Recent Developments in the Economics of Executive Compensation

Edited by Robert W. Kolb, Professor of Finance and Frank W. Considine Chair of Applied Ethics, Quinlan School of Business, Loyola University Chicago, US

• Contents:AcknowledgementsIntroduction Robert W. KolbPART IAN OVERVIEW OF EXECUTIVE COMPENSATION 1. Steven N. Kaplan (2013), ‘CEO Pay and Corporate Governance in the U.S.: Perceptions, Facts, and Challenges’, Journal of Applied Corporate Finance, 25 (2), Spring, 8–252. John E. Core, Wayne R. Guay and David F. Larcker (2003), ‘Executive Equity Compensation and Incentives: A Survey’, Federal Reserve Bank of New York Economic Policy Review, 9 (1), April, 27–503. Brian J. Hall and Kevin J. Murphy (2003), ‘The Trouble With Stock Options’, Journal of Economic Perspectives, 17 (3), Summer, 49–704. Arantxa Jarque (2008), ‘CEO Compensation: Trends, Market Changes, and Regulation’, Federal Reserve Bank of Richmond Economic Quarterly, 94 (3), Summer, 265–3005. Carola Frydman and Dirk Jenter (2010), ‘CEO Compensation’, Annual Review of Financial Economics, 2 (1), December, 75–102[28]6. Michael Faulkender, Dalida Kadyrzhanova, N. Prabhala and Lemma Senbet (2010), ‘Executive Compensation: An Overview of Research on Corporate Practices and Proposed Reforms’, Journal of Applied Corporate Finance, 22 (1), Winter, 107–18PART IITHE GROWTH AND MAGNITUDE OF EXECUTIVE COMPENSATION 7. Lucian Bebchuk and Yaniv Grinstein (2005), ‘The Growth of Executive Pay’, Oxford Review of Economic Policy, 21 (2), Summer, 283–3038. Xavier Gabaix and Augustin Landier (2008), ‘Why Has CEO Pay Increased So Much?’, Quarterly Journal of Economics, 123 (1), February, 49–1009. Carola Frydman and Raven E. Saks (2010), ‘Executive Compensation: A New View from a Long-Term Perspective, 1936–2005’, Review of Financial Studies, 23 (5), May, 2099–13810. Richard A. Lord and Yoshie Saito (2010), ‘Trends in CEO Compensation and Equity Holdings for S&P 1500 Firms: 1994–2007’, Journal of Applied Finance, 20 (2), 40–5611. Martin J. Conyon, John E. Core and Wayne R. Guay (2011), ‘Are U.S. CEOs Paid More Than U.K. CEOs? Inferences from Risk-adjusted Pay’, Review of Financial Studies, 24 (2), February, 402–3812. Nuno Fernandes, Miguel A. Ferreira, Pedro Matos and Kevin J. Murphy (2013), ‘Are U.S. CEOs Paid More? New International Evidence’, Review of Financial Studies, 26 (2), February, 323–6713. Xavier Gabaix, Augustin Landier and Julien Sauvagnat (2014), ‘CEO Pay and Firm Size: An Update After the Crisis’, Economic Journal, 124 (574), February, F40–F59PART IIITHE STRUCTURE OF EXECUTIVE COMPENSATION 14. Eli Ofek and David Yermack (2000), ‘Taking Stock: Equity-Based Compensation and the Evolution of Managerial Ownership’, Journal of Finance, LV (3), June, 1367–8415. Brian J. Hall and Kevin J. Murphy (2000), ‘Optimal Exercise Prices for Executive Stock Options’, American Economic Review, 90 (2), May, 209–1416. Anil Arya and Brian Mittendorf (2005), ‘Offering Stock Options to Gauge Managerial Talent’, Journal of Accounting and Economics, 40 (1–3), December, 189–21017. Bo Becker (2006), ‘Wealth and Executive Compensation’, Journal of Finance, LXI (1), February, 379–9718. Jayant R. Kale, Ebru Reis and Anand Venkateswaran (2010), ‘Promotion Incentives and Corporate Performance: Is There a Bright Side to “Overpaying” the CEO?’, Journal of Applied Corporate Finance, 22 (1), Winter, 119–2819. Radhakrishnan Gopalan, Todd Milbourn, Fenghua Song and Anjan V. Thakor (2014), ‘Duration of Executive Compensation’, Journal of Finance, LXIX (6), December, 2777–81720. Lucian A. Bebchuk and Robert J. Jackson, Jr. (2005), ‘Executive Pensions’, Journal of Corporation Law, 30 (4), 823–55PART IVARE HIGHLY PAID CEOS THE WINNERS OF A WAGE TOURNAMENT?21. Lucian A. Bebchuk, K.J. Martijn Cremers and Urs C. Peyer (2011), ‘The CEO Pay Slice’, Journal of Financial Economics, 102 (1), October, 199–22122. Zhihong Chen, Yuan Huang and K.C. John Wei (2005), ‘Executive Pay Disparity and the Cost of Equity Capital’, Journal of Financial and Quantitative Analysis, 48 (3), June, 849–8523. Omesh Kini and Ryan Williams (2012), ‘Tournament Incentives, Firm Risk, and Corporate Policies’, Journal of Financial Economics, 103 (2), February, 350–7624. Steven N. Kaplan and Joshua Rauh (2013), ‘It's the Market: The Broad-Based Rise in the Return to Top Talent’, Journal of Economic Perspectives, 27 (3), Summer, 35–5525. Olubunmi Faleye, Ebru Reis and Anand Venkateswaran (2013), ‘The Determinants and Effects of CEO-Employee Pay Ratios’, Journal of Banking and Finance, 37 (8), August, 3258–72PART VEXECUTIVE COMPENSATION AND CORPORATE GOVERNANCE26. Kevin J. Murphy (2002), ‘Explaining Executive Compensation: Managerial Power versus the Perceived Cost of Stock Options’, University of Chicago Law Review, 69 (3), Summer, 847–6927. Lucian Arye Bebchuk and Jesse M. Fried (2003), ‘Executive Compensation as an Agency Problem’, Journal of Economic Perspectives, 17 (3), Summer, 71–9228. Marianne Bertrand and Sendhil Mullainathan (2000), ‘Agents With and Without Principals’, American Economic Review, 90 (2), May, 203–829. Jay C. Hartzell and Laura T. Starks (2003), ‘Institutional Investors and Executive Compensation’, Journal of Finance, LVIII (6), December, 2351–7430. Vidhi Chhaochharia and Yaniv Grinstein (2009), ‘CEO Compensation and Board Structure’, Journal of Finance, LXIV (1), February, 231–6131. Henrik Cronqvist and Rüdiger Fahlenbrach (2013), ‘CEO Contract Design: How do Strong Principals Do It?’, Journal of Financial Economics, 108 (3), June, 659–7432. Marianne Bertrand and Sendhil Mullainathan (2003), ‘Enjoying the Quiet Life? Corporate Governance and Managerial Preferences’, Journal of Political Economy, 111 (5), October, 1043–7533. Martin J. Conyon (2014), ‘Executive Compensation and Board Governance in US Firms’, Economic Journal, 124 (574), February, F60–F89Volume IIAcknowledgementsIntroduction An Introduction by the editor appears in Volume IPART IPAY AND PERFORMANCE: ARE THEY RELATED? 1. Lucian A. Bebchuk and Jesse M. Fried (2005), ‘Pay Without Performance: Overview of the Issues’, Journal of Corporation Law, 30 (4), Summer, 647–732. John E. Core, Wayne R. Guay and Randall S. Thomas (2005), ‘Is U.S. CEO Compensation Inefficient Pay Without Performance?’, Michigan Law Review, 103, May, 1142–853. Adair Morse, Vikram Nanda and Amit Seru (2011), ‘Are Incentive Contracts Rigged by Powerful CEOs?’, Journal of Finance, LXVI (5), October, 1779–8214. Alex Edmans and Xavier Gabaix (2009), ‘Is CEO Pay Really Inefficient? A Survey of New Optimal Contracting Theories’, European Financial Management, 15 (3), June, 486–96PART II: COMPENSATION AND RISK-TAKING: INCENTIVIZING AND RESTRAINING5. Richard T. Holden (2005), ‘The Original Management Incentive Schemes’, Journal of Economic Perspectives, 19 (4), Fall, 135–446. Patrick Bolton, Hamid Mehran and Joel Shapiro (2010), ‘Executive Compensation and Risk Taking’, Federal Reserve Bank of New York, Staff Report No. 456, June, i, 1–437. Jennifer N. Carpenter (2000), ‘Does Option Compensation Increase Managerial Risk Appetite?’, Journal of Finance, LV (5), October, 2311–318. Stephen A. Ross (2004), ‘Compensation, Incentives, and the Duality of Risk Aversion and Riskiness’, Journal of Finance, LIX (1), February, 207–259. Jeffrey L. Coles, Naveen D. Daniel and Lalitha Naveen (2006), ‘Managerial Incentives and Risk–Taking’, Journal of Financial Economics, 79 (2), February, 431–6810. John McCormack and Judy Weiker (2010), ‘Rethinking “Strength of Incentives” for Executives of Financial Institutions’, Journal of Applied Corporate Finance, 22 (3), Summer, 65–7211. Zhiyong Dong, Cong Wang and Fei Xie (2010), ‘Do Executive Stock Options Induce Excessive Risk Taking?’, Journal of Banking and Finance, 34 (10), October, 2518–2912. Neil Brisley (2006), ‘Executive Stock Options: Early Exercise Provisions and Risk‑taking Incentives’, Journal of Finance, LXI (5), October, 2487–50913. George J. Benston and Jocelyn D. Evan (2006), ‘Performance Compensation Contracts and CEOs' Incentive to Shift Risk to Debtholders: An Empirical Analysis’, Journal of Economics and Finance, 30 (1), Spring, 70–9214. Cory A. Cassell, Shawn X. Huang, Juan Manuel Sanchez and Michael D. Stuart (2012) , ‘Seeking Safety: The Relation Between CEO Inside Debt Holding and the Riskiness of Firm Investment and Financial Policies’, Journal of Financial Economics, 103 (3), March, 588–61015. Yixin Liu, David C. Mauer and Yilei Zhang (2014), ‘Firm Cash Holdings and CEO Inside Debt’, Journal of Banking and Finance, 42, May, 83–10016. Divya Anantharaman, Vivian W. Fang and Guojin Gong (2014), ‘Inside Debt and the Design of Corporate Debt Contracts’, Management Science, 60 (5), May, 1260–80PART III: EXECUTIVE INCENTIVES AND FIRM MANAGEMENT 17. Efraim Benmelech, Eugene Kandel and Pietro Veronesi (2010), ‘Stock-Based Compensation and CEO (Dis)incentives’, Quarterly Journal of Economics, 125 (4), November, 1769–82018. Patrick Bolton, José Scheinkman and Wei Xiong (2006), ‘Executive Compensation and Short-Termist Behaviour in Speculative Markets’, Review of Economic Studies, 73 (3), July, 577–61019. Henrik Cronqvist, Fredrik Heyman, Mattias Nilsson, Helena Svaleryd and Jonas Vlachos (2008), ‘Do Entrenched Managers Pay Their Workers More?’, Journal of Finance, LXIV (1), February, 309–3920. Ronald W. Masulis and Syed Walid Reza (2014), ‘Agency Problems of Corporate Philanthropy’, Review of Financial Studies, 28 (2), February, 592–636A: Managing Assets21. Tom Nohel and Steven Todd (2004), ‘Stock Options and Managerial Incentives to Invest’, Journal of Derivatives Accounting, 1 (1), March, 29–4622. Ulrike Malmendier and Geoffrey Tate (2005), ‘CEO Overconfidence and Corporate Investment’, Journal of Finance, LX (6), December, 2661–70023. Ulrike Malmendier and Geoffrey Tate (2008), ‘Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction’, Journal of Financial Economics, 89 (1), July, 20–4324. Jie Cai and Anand M. Vijh (2007), ‘Incentive Effects of Stock and Option Holdings of Target and Acquirer CEOs’, Journal of Finance, LXII (4), August, 1891–93325. Eliezer M. Fich, Jie Cai and Anh L. Tran (2011), ‘Stock Option Grants to Target CEOs During Private Merger Negotiations’, Journal of Financial Economics, 101 (2), May, 413–3026. Yixin Liu and David C. Mauer (2011), ‘Corporate Cash Holdings and CEO Compensation Incentives’, Journal of Financial Economics, 102 (1), October, 183–98B: Managing Liabilities 27. Hernan Ortiz‑Molina (2006), ‘Top Management Incentives and the Pricing of Corporate Public Debt’, Journal of Financial and Quantitative Analysis, 41 (2), June, 317–4028. Katharina Lewellen (2006), ‘Financing Decisions When Managers Are Risk Averse’, Journal of Financial Economics, 82 (3), December, 551–8929. Hernan Ortiz‑Molina (2007), ‘Executive Compensation and Capital Structure: The Effects of Convertible Debt and Straight Debt on CEO Pay’, Journal of Accounting and Economics, 43 (1), March, 69–9330. Paul Brockman, Xiumin Martin and Emre Unlu (2010), ‘Executive Compensation and the Maturity Structure of Corporate Debt’, Journal of Finance, LXV (3), June, 1123–6131. Sudheer Chava, Praveen Kumar and Arthur Warga (2010), ‘Managerial Agency and Bond Covenants’, Review of Financial Studies, 23 (3), March, 1120–48Volume IIIAcknowledgementsIntroduction An introduction by the editor appears in Volume IPART IMANAGERIAL INCENTIVES, INSIDE INFORMATION, AND EARNINGS A: Exploiting Inside Information1. J. Carr Bettis, John M. Bizjak and Michael L. Lemmon (2005), ‘Exercise Behavior, Valuation, and the Incentive Effects of Employee Stock Options’, Journal of Financial Economics, 76 (2), May, 445–702. David Aboody, John Hughes, Jing Liu and Wei Su (2008), ‘Are Executive Stock Option Exercises Driven by Private Information?’, Review of Accounting Studies, 13 (4), December, 551–703. Robert Brooks, Don M. Chance and Brandon Cline (2012), ‘Private Information and the Exercise of Executive Stock Options’, Financial Management, 41 (3), Fall, 733–644. Jennifer N. Carpenter, Richard Stanton and Nancy Wallace (2010), ‘Optimal Exercise of Executive Stock Options and Implications for Firm Cost’, Journal of Financial Economics, 98 (2), November, 315–37B: Manipulating Earnings and Disclosure for Personal Profit 5. Daniel Bergstresser and Thomas Philippon (2006), ‘CEO Incentives and Earnings Management’, Journal of Financial Economics, 80 (3), June, 511–296. Keith J. Crocker and Joel Slemrod (2007), ‘The Economics of Earnings Manipulation and Managerial Compensation’, RAND Journal of Economics, 38 (3), Autumn, 698–7137. Christopher S. Armstrong, Alan D. Jagolinzer and David F. Larcker (2010), ‘Chief Executive Officer Equity Incentives and Accounting Irregularities’, Journal of Accounting Research, 48 (2), May, 225–718. Lin Peng and Ailsa Röell (2014), ‘Managerial Incentives and Stock Price Manipulation’, Journal of Finance, LXIX (2), April, 487–526PART IIOPTION DATING GAME9. Randall A. Heron and Erik Lie (2007), ‘Does Backdating Explain the Stock Price Pattern Around Executive Stock Option Grants?’, Journal of Financial Economics, 83 (2), February, 271–9510. M.P. Narayanan and H. Nejat Seyhun (2008), ‘The Dating Game: Do Managers Designate Option Grant Dates to Increase their Compensation?’, Review of Financial Studies, 21 (5), September, 1907–4511. M.P. Narayanan, Cindy A. Schipani and H. Nejat Seyhun (2007), ‘The Economic Impact of Backdating of Executive Stock Options’, Michigan Law Review, 105 (8), June, 1597–64112. Jesse M. Fried (2008), ‘Option Backdating and Its Implications’, Washington and Lee Law Review, 65, 853–86PART IIIOPTION VALUATION: OBJECTIVE AND SUBJECTIVE 13. Don M. Chance and Tung-Hsiao Yang (2005), ‘The Utility-Based Valuation and Cost of Executive Stock Options in a Binomial Framework: Issues and Methodologies’, Journal of Derivatives Accounting, 2 (2), September, 165–8814. Jie Cai and Anand M. Vijh (2005), ‘Executive Stock and Option Valuation in a Two State-Variable Framework’, Journal of Derivatives, Spring, 9–2715. Jonathan E. Ingersoll, Jr. (2006), ‘The Subjective and Objective Evaluation of Incentive Stock Options’, Journal of Business, 79 (2), 453–8716. Ronnie Sircar and Wei Xiong (2007), ‘A General Framework for Evaluating Executive Stock Options’, Journal of Economic Dynamics and Control, 31 (7), July, 2317–4917. Jakša Cvitanić, Zvi Wiener and Fernando Zapatero (2008), ‘Analytic Pricing of Employee Stock Options’, Review of Financial Studies, 21 (2), April, 683–72418. Jonathan E. Ingersoll, Jr. (2006), ‘Valuing Reload Options’, Review of Derivatives Research, 9 (1), January, 67–10519. L.C.G. Rogers and José Scheinkman (2007), ‘Optimal Exercise of Executive Stock Options’, Finance and Stochastics, 11 (3), July, 357–7220. Frank D. Hodge, Shiva Rajgopal and Terry Shevlin (2009), ‘Do Managers Value Stock Options and Restricted Stock Consisted with Economic Theory?’, Contemporary Accounting Research, 26 (3), Fall, 899–932