Dead ends Sadler, Evan
Journal of economic theory,
January 2021, 2021-01-00, Volume:
191
Journal Article
Peer reviewed
Evidence suggests that individuals and firms are sometimes more innovative when subject to low-powered incentives. I offer an explanation based on a characteristic feature of creative work: hitting ...dead ends. An agent works on successive ideas, each of which may lead to a breakthrough with some probability. At any time, the agent may abandon her current idea, incurring delay to come up with a new one. Larger rewards and greater impatience cause the agent to spend more time on each idea and to work on lower quality ideas. I subsequently consider a planner who can choose tax or subsidy policies to maximize the value of research spillovers. If spillovers are large and relatively certain, then optimal policy favors the use of subsidies. If spillovers are concentrated among the highest quality ideas, then optimal policy favors taxes. The results highlight why policy makers should care about the structure of incentives for innovation beyond simply encouraging more overall investment.
PurposeEmployee Stock Options ESOs have been used widely as a component of employees' compensation. To maximise the incentive effect of these options it is very important to understand the exercise ...decision of the employees. This is an important financial decision that is dependent on both rational and psychological factors. This paper aims to study the mediating role of Herding Bias on Personality Traits and the employees' decision to exercise ESOs.Design/methodology/approachThe data were collected through a self-structured questionnaire from 210 employees of Banks and NBFCs Non-Banking Financial Companies who have received and exercised the ESOs. SPSS MACRO version 25 was used to understand the mediational effect of Herding Bias on Personality Traits and Employees' decision to exercise their ESOs.FindingsThe results showed that Personality Traits affect the employees' decision to exercise their ESOs. The study also shows a partial negative mediating effect of Herding Bias on Personality Traits and employees' decision to exercise ESOs.Originality/valueLimited study has been conducted on how the employees make their decision to exercise ESOs. Although extant studies have touched upon the importance of including behavioural biases in ascertaining the exercise decision of the employees, the predictors of the behavioural biases have not been studied under this context. To the best of the author's knowledge, this study is the first in itself to study the inter-linkage between Personality Traits, Herding Bias and employees' decision to exercise ESOs.
Employing FAS 123R, which mandated option expensing, as a quasi-natural experiment, we investigate the causal effects of CEO risk incentives (vega) on cash policies of U.S. firms. Employing a ...difference-in-differences framework with propensity-score matching, we find no association between changes in CEO portfolio vega and corporate cash holdings, including the marginal value of cash. Our finding applies to both firms most and least affected by the regulatory change. Thus, our evidence challenges the view that stock options are a first-order determinant of corporate cash policy, implying that any previously documented relation may reflect endogeneity rather than a causal influence.
The choice of payment methods in M&A deals can affect bidder stock and bond value through two channels simultaneously: signaling and wealth transfer. We propose a method to disentangle these two ...effects by combining observed bidder stock and bond abnormal returns around deal announcements. Our findings indicate that the negative average bidder stock return in stock deals is mostly caused by signaling, and the negative average bidder bond return in cash deals is mostly due to wealth transfer. We also hypothesize that signaling is related to bidder information uncertainty, while wealth transfer is related to deal significance and bidder default risk. Cross-sectional analysis supports our conjecture.
•Senior corporate executives allocate corporate resources to investments in productive capabilities.•Economic analysis must comprehend how the system of executive pay influences decisions to allocate ...corporate resources.•U.S. stock-based pay incentivizes top corporate executives to make allocation decisions to boost the company’s stock price.•This stock-based pay rewards executive decisions that increase the company’s stock price by speculation and manipulation.•The Theory of Innovative Enterprise debunks the ideology that companies should be run to “maximize shareholder value.”
Using novel data on employee stock purchase plans (ESPPs), we show that aggregate purchases of company stock by lower-level employees predict future stock returns. Firms in the top quartile of ESPP ...purchases outperform those in the bottom quartile by 10% in the year after purchase. The relation between ESPP purchases and future stock returns is stronger for firms with high information asymmetry. Furthermore, we find that high ESPP purchases are associated with a lower likelihood of breaks in strings of consecutive earnings increases, as well as higher future sales growth and more innovation. These findings support the hypothesis that lower-level employees have information about future firm performance. We examine and reject a number of alternative explanations. Our results have implications for firms using employees as a source of capital, accounting issues related to expensing of equity-based compensation, and disclosure policy.
Data, as supplemental material, are available at
http://dx.doi.org/10.1287/mnsc.2015.2226
.
This paper was accepted by Wei Jiang, finance
.
PurposeThis study aims to address the question of why organizations do not uniformly apply pay for performance (PFP) throughout the organization, focusing on the wider occupational structure in which ...they and the jobs they create are embedded. The authors propose a model of “occupational differentiation” whereby the probability of a job within a given organization having PFP increases with the levels of monitoring difficulty and requisite human asset specificity characterizing the occupation to which a job belongs, being highest in occupations characterized by high levels of both (generally managerial and professional occupations).Design/methodology/approachUsing the Workplace Employment Relations Survey (a nationally representative matched employer–employee dataset for Britain), this paper investigates this question for all 350 occupations delineated by the UK's Office for National Statistics using regression methods that adjust for other confounding factors such as demographic factors and workplace fixed effects.FindingsThe authors find organizations “occupationally differentiate” the use of PFP in ways consistent with the model, i.e. PFP is most likely to be found in occupations characterized by both high monitoring difficulty and high requisite human asset specificity (mainly managerial and professional occupations) and least likely in occupations scoring low in both. The finding holds across PFP types (individual, group, organizational), whether organizations are large or small, and hold across most industrial sectors.Research limitations/implicationsThe main implication of this study is that organizations appear to be taking into consideration whether the wider profession to which a job belongs when implementing PFP, irrespective of their own human resource management strategies and organizational context. There are a few limitations to this study, with the main one being that this model is mainly confined to empirical support is only found in the private sector. The public sector appears to be beyond the reach of the model, where PFP implementation is generally rarer. A second limitation is that the dataset is from 2011 and only covers a single country.Practical implicationsGiven organizations appear to be implementing PFP based on occupation, this may lead to equity concerns, as different groups are being treated differently within organizations based upon their occupational group.Social implicationsAs PFP jobs tend to pay more than non-PFP jobs and PFP prevalence has been growing, by being more likely to implement it for generally high-paid groups (generally higher managerial and professional occupations), PFP may contribute to wider pay differentials within and between organizations.Originality/valueBy introducing the occupational-level of analysis and the differential nature of tasks across occupational groups, the model offers a new midrange, sociological perspective to understanding intra-organizational dynamics in PFP use and potentially human resource practices more broadly.
Powerful CEOs, cash bonus contracts and firm performance Bachmann, Rebecca L.; Loyeung, Anna; Matolcsy, Zoltan P. ...
Journal of business finance & accounting,
January/February 2020, 2020-01-00, 20200101, Volume:
47, Issue:
1-2
Journal Article
Peer reviewed
Open access
We investigate whether powerful chief executive officers (CEOs) influence the conditions of their cash bonus contracts. Specifically, we examine (i) the association between CEO power and the ...proportion of ex‐ante cash bonus to base salary (bonus ratio), (ii) the association between CEO power and the relative use of non‐financial to financial performance targets in cash bonus contracts, and (iii) the performance consequences of incorporating non‐financial targets in cash bonus contracts. Results show that powerful CEOs are associated with greater ex‐ante bonus ratios and higher proportions of non‐financial performance targets compared to less powerful CEOs. Furthermore, the use of quantitative and corporate social responsibility (CSR)‐related non‐financial performance targets is positively associated with subsequent firm performance, and the use of undefined non‐financial performance targets is negatively associated with subsequent firm performance. These results are robust to alternative econometric specifications and variable definitions.
We specify a correlated random effect model to study inter-industry wage differentials using a small sample of Chinese firm level panel data. We find workers in real estate industry and computer and ...software industry enjoy a wage premium, and firms located in western areas pay less. Firm size, and the indicator of CEO also holds the position of general manager are positively related to earnings, while the annual pay for the high-level manager, stock shares held by the general manager, and low human capital endowments of workforce negatively impact wage. We find the profitability of a firm does not affect the average annual pay.
We investigate whether accounting comparability is associated with the likelihood that CEO compensation is tied to relative accounting performance (e.g., return on assets). We predict that higher ...accounting comparability increases the risk-sharing benefit of accounting-based RPE because peer firm performance better controls for common risk in RPE firm performance. Thus, firms that have higher accounting comparability with potential performance peers will be more likely to include accounting-based RPE as a component of the total CEO compensation contract. We find support for this prediction using (1) an explicit test design that relies on the ex ante terms of CEO compensation contracts obtained from proxy disclosures, and (2) an implicit design that relies on the actual realizations of CEO compensation. To provide further evidence, we examine the association between accounting comparability and the selection of performance peers when the CEO compensation contract includes an accounting-based RPE component. We find that higher comparability between the RPE firm and a potential peer firm increases (decreases) the potential peer firm’s likelihood of being selected into (dropped from) the peer group. Cross-sectional analyses show that this association is less pronounced, or not present, when the relative performance measure is price-based (as opposed to accounting-based), indicating that these results do not merely reflect a more general role of comparability in all RPE contracts.
PDF
