The directors' and officers' insurance premium: an outside assessment of the quality of corporate governance

Using a sample of directors' and officers' (D & O) premiumsgathered from the proxy statements of Canadian companies, thisarticle examines the D & O premium as a measure of ex antelitigation risk. I find a significant association between D& O premiums and variables that proxy for the quality offirms' governance structures. The association between the proxiesfor governance structure quality and D & O premiums is robustto a number of alternative specifications. This article providesconfirmatory evidence that the D & O premium reflects thequality of the firm's corporate governance by showing that measuresof weak governance implied by the D & O premium are positivelyrelated to excess CEO compensation. The overall results suggestthat D & O premiums contain useful information about thequality of firms' governance.     

Stock Market Anomalies: What Can We Learn from Repurchases and Insider Trading?

We examine whether managers’ trading decisions (both at a firm and personal level) are correlated with trading strategies suggested by the operating accruals and the post-earnings announcement drift (SUE) anomalies. We discuss advantages and disadvantages of the use of managerial trading activity to infer managers’ private valuation about their own securities. Our results provide corroborative evidence for the accruals anomaly, i.e., managers’ repurchase and insider trading behavior varies consistently with the information underlying the operating accruals trading strategy. On the other hand, we do not find corroborative evidence for the SUE anomaly.

An Economic and Ethical Approach to Charity and to Charity Endowments

We examine how and why donors divide gifts between people in the present (across distance) and between the present and future (across time). US donors tend to give less to charities that benefit the poor and more to charities that benefit the non-poor (such as museums, universities, and arts organizations). Many of these wealthier charities have created endowments that benefit not only present persons, but also future persons. We develop a shorthand framework for linking time to distance in charitable allocations that incorporates a “proximity preference,” i.e., charity that prefers those who are nearer to us whether by reason of physical distance, psychic-identity, or temporal distance. Even though ethical considerations suggest that recipients' level of need should be the dominant factor in allocating gifts, donors also express preferences, ceteris paribus, for benefits arriving sooner rather than later, and for recipients who are ``closer'' rather than farther away.     

The power of the pen and executive compensation

We examine the press’ role in monitoring and influencing executive compensation practice using more than 11,000 press articles about CEO compensation from 1994 to 2002. Negative press coverage is more strongly related to excess annual pay than to raw annual pay, suggesting a sophisticated approach by the media in selecting CEOs to cover. However, negative coverage is also greater for CEOs with more option exercises, suggesting the press engages in some degree of “sensationalism.” We find little evidence that firms respond to negative press coverage by decreasing excess CEO compensation or increasing CEO turnover.     

Is U.S. CEO Compensation Broken?

This article addresses four major concerns about the pay of U.S. CEOs: (1) failure to pay for performance; (2) excessive levels of pay; (3) failure to index options and other equity-based pay, resulting in windfalls; and (4) too much unwinding of incentives. The authors' main message is that most if not all of these concerns are exaggerated by the popular tendency to focus on the annual income of CEOs (consisting of salary, bonus, and stock and option grants) while ignoring their existing holdings of company equity.
Taking into account the effect of stock price changes on CEO wealth leads the authors to a number of interesting conclusions. First, the pay-for-performance relationship is strong and has grown significantly in recent years. Second, what may appear as above-normal growth in annual pay levels may be necessary to compensate CEOs for the increased risk associated with their growing level of equity-based incentives. Third, conventional (that is, unindexed) stock and options, when viewed as a combination of market risk and firm-specific risk, may provide an optimal solution to two conflicting demands: shareholders' demand for executive rewards tied to company performance and executives' preference to diversify their wealth. Finally, there is little evidence of widespread CEO unwinding of incentives, and levels of CEO equity ownership in the U.S. remain impressively high.     

Discussion of “Optimal Conservatism with Earnings Manipulation”

In this discussion, I briefly summarize the key features of Bertomeu, Darrough, and Xue's (hereafter BDX) model. I then examine the four key assumptions that BDX employ to arrive at their results: (i) firms contract only on earnings; (ii) conservative earnings are better for contracting; (iii) conservatism motivates upward earnings manipulation; and (iv) conservatism is endogenous. I then briefly conclude.     

Do independent directors cause improvements in firm transparency?

Although recent research documents a positive relation between corporate transparency and the proportion of independent directors, the direction of causality is unclear. We examine a regulatory shock that substantially increased board independence for some firms, and find that information asymmetry, and to some extent management disclosure and financial intermediation, changed at firms affected by this shock. We also examine whether these effects vary as a function of management entrenchment, information processing costs, and required changes to audit committee independence. Our results suggest that firms can alter their corporate transparency to suit the informational demands of a particular board structure.     

Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility

The costs associated with compiling data on employee stock option portfolios is a substantial obstacle in investigating the impact of stock options on managerial incentives, accounting choice, financing decisions, and the valuation of equity. We present an accurate method of estimating option portfolio value and the sensitivities of option portfolio value to stock price and stock-return volatility that is easily implemented using data from only the current year's proxy statement or annual report. This method can be applied to either executive stock option portfolios or to firm-wide option plans. In broad samples of actual and simulated CEO option portfolios, we show that these proxies capture more than 99% of the variation in option portfolio value and sensitivities. Sensitivity analysis indicates that the degree of bias in these proxies varies with option portfolio characteristics, and is most severe in samples of CEOs with a large proportion of out-of-the-money options. However, the proxies' explanatory power remains above 95% in all subsamples.     

Have the tax benefits of debt been overestimated?

We re-examine the claim that many corporations are underleveraged in that they fail to take full advantage of debt tax shields. We show prior results suggesting underleverage stems from biased estimates of tax benefits from interest deductions. We develop improved estimates of marginal tax rates using a non-parametric procedure that produces more accurate estimates of the distribution of future taxable income. We show that additional debt would provide firms with much smaller tax benefits than previously thought, and when expected distress costs and difficult-to-measure non-debt tax shields are also considered, it appears plausible that most firms have tax-efficient capital structures.