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Contracts and Incentives

Paper Session

Friday, Jan. 4, 2019 10:15 AM - 12:15 PM

Hilton Atlanta, 205-206-207
Hosted By: American Finance Association
  • Chair: Alex Edmans, London Business School

Regulating Charlatans in High-Skill Professions

Jonathan Berk
,
Stanford University
Jules van Binsbergen
,
University of Pennsylvania

Abstract

We model a market for a skill that is in short supply and high demand, where the presence of charlatans (professionals who sell a service that they do not deliver on) is an equilibrium outcome. We use this model to evaluate the standards and disclosure requirements that exist in these markets. We show that reducing the number of charlatans through regulation decreases consumer surplus. Although both standards and disclosure drive charlatans out of the market, consumers are still left worse off because of the resulting reduction in competition amongst producers. Producers, on the other hand, strictly benet from the regulation, implying that the regulation we observe in these markets likely derives from producer interests. Using these insights, we study the factors that drive the cross-sectional variation in charlatans across
professions. Professions with weak trade groups, skills in larger supply, shorter training periods and less informative signals regarding the professional's skill, are more likely to feature charlatans.

Is Cash Still King: Why Firms Offer Non-Wage Compensation and the Implications for Shareholder Value

Tim Liu
,
University of North Carolina
Christos Makridis
,
Massachusetts Institute of Technology
Paige Ouimet
,
University of North Carolina
Elena Simintzi
,
University of British Columbia

Abstract

Over the past 40 years, the share of non-wage benefits in employee compensation grew from 5% to 30%. Using disaggregated data from Glassdoor, we first document a series of stylized facts about the availability of non-wage benefits and how these benefits are correlated with firm characteristics. We subsequently test three non-mutually exclusive hypotheses explaining the cross-section of non-wage benefits: (i) tax advantages, (ii) attracting and retaining specific employee groups, and (iii) mitigating the disutility of work. We find empirical evidence in support of all three hypotheses. Moreover, firms with higher rated benefits exhibit larger ex-post equity returns, suggesting that differences in non-cash types of compensation are not fully priced by the market.

Career Risk and Market Discipline in Asset Management

Andrew Ellul
,
Indiana University, CEPR, CSEF, and ECGI
Marco Pagano
,
University of Naples Federico II
Annalisa Scognamiglio
,
University of Naples Federico II and CSEF

Abstract

We establish a role for the labor market in disciplining asset managers by studying the impact of hedge fund liquidations on managers’ careers, using hand-collected data on 1,948 individuals. Top-level managers of funds liquidated after persistently poor relative performance suffer job demotion entailing an average yearly compensation loss of $664,000, while no scarring effects are present when liquidations are preceded by normal performance or for mid-level employees. Based on a model with moral hazard and adverse selection, these results can be ascribed to reputation loss by asset managers rather than career risk, and suggest that performance-induced liquidations supplement compensation-based incentives.

CEO Incentives for Risk-Taking and Compensation Duration

Thomas Kubick
,
University of Kansas
John Robinson
,
Texas A&M University
Laura Starks
,
University of Texas

Abstract

We hypothesize that corporate boards structure CEO compensation contracts to offset contrasting managerial incentives from compensation risk incentives (vega) versus contract horizon (duration). We find that compensation contracts with greater sensitivity to stock return volatility have longer durations and cross-sectional tests show an even stronger association for certain firm and CEO characteristics. We support the causal implications of our results using quasi-exogenous shocks: the adoptions of the Sarbanes-Oxley Act (SOX) and the Financial Accounting Standard (FAS) 123R. Our results suggest that boards are less willing to grant short duration compensation contracts in the presence of greater compensation risk incentives.
Discussant(s)
Philip Bond
,
University of Washington
Steven Kaplan
,
University of Chicago
Paul Oyer
,
Stanford University
Kevin Murphy
,
University of Southern California
JEL Classifications
  • G3 - Corporate Finance and Governance