Executive compensation and aspirational peer benchmarking

Using novel data on explicit compensation benchmarking peer groups, I document that small public firms engage in upward compensation benchmarking to a much greater extent than larger firms. Small firms choose aspirational peers that reflect their executives’ shifting opportunity sets. For these firms, compensation benchmarking is indicative of future growth and performance, and the rate at which pay adjusts toward peer levels is sensitive to executives’ outside employment opportunities. Growing and outperforming small firms strategically use upward benchmarking to adjust pay in an effort to retain valuable managerial talent.     

Minimally altruistic wages and unemployment in a matching model with monopsony

A monopsony model with a symmetric equilibrium is developed where posting higher wages reduces employee departures. This monopsony implies that wage changes have small effects on profits so that employer altruism affects wages as well. Even selfish firms act altruistically if workers punish firms that fail to do so. If the marginal utility of income falls sharply with income, the model can explain modest responses of wages to shifts in labor demand. If there are fluctuations in the altruism required by workers, the low correlation of wages and employment and the sizes of the cyclical fluctuations in these two series can be rationalized.     

Technology driven organizational structure of the firm

We model a corporate firm with a variable internal organizational structure that adapts to various degrees of technological cooperation. The entrepreneur determines the organizational structure that maximizes profits under participation constraints. Wages are determined by an internal cooperative pay-system, constrained by external reservation wages. We show that closer cooperation between production-workers results in a shorter organization with enhanced positional wages relative to the external benchmarks. The corporate firm is embedded in a competitive market economy that determines reservation wages and market prices. We also allow for more general technologies and provide conditions guaranteeing a finite optimal size of the firm. We thank Rob Gilles, Dolf Talman and an anonymous referee for their comments on a previous version of this paper.     

The peer effect of corporate financial decisions around split share structure reform in China

We examine the peer effects in financial decisions of Chinese listed companies for the period of 1998–2016 as well as around Split Share Structure Reform (SSSR). Consistent with the information‐based theory of learning, Chinese firms do adjust their capital structure in response to the changes in their peers’ market leverage ratios. The industries that are more competitive, with more young firms, and high leverage volatility tend to exhibit stronger peer effects. Within industries, the firms with lower market share and profits, paying no dividends, and being financially constrained mimic their peers more strongly than their counterparts. The evidence around the SSSR reveals that firms tend to follow their industry peers and leaders more closely in making financial decisions after the reform. Finally, the mimicking behavior in financial decisions enhances firm value in the long run and this finding is more evident after the reform.     

Moral hazard in teams with subjective evaluations

This article studies moral hazard in teams where workers' wages depend on two types of performance measures: objective team output and subjective evaluations. The evaluations include both self‐ and peer evaluations. I find that when evaluations become less subjective, workers' wages should be more sensitive not only to their evaluations but also to the team's output. I also show that subjective evaluations should be used in relative terms only when the degree of subjectivity is not too high. The results also associate the introduction of a budget breaker with the level of subjectivity within organizations.     

Profit sharing (with workers) facilitates collusion (among firms)

We show how profit sharing by firms with workers facilitates collusion among firms in a dynamic oligopoly environment with uncertain demand. We first show that firm profits can always be increased by tying wages to market conditions. The optimal agreement takes the form of an option and features partial sharing because increased sharing raises the expected price‐wage differential, but reduces price‐wage variability. We then show that given any cartel, there exist market conditions such that simply giving some expected profit to workers raises expected firm profits via the transfer's impact on the incentive to cheat on the cartel.     

Can Wages Buy Honesty? The Relationship Between Relative Wages and Employee Theft

In this study, we examine whether, for a sample of retail chains, high levels of employee compensation can deter employee theft, an increasingly common type of fraudulent behavior. Specifically, we examine the extent to which relative wages (i.e., employee wages relative to the wages paid to comparable employees in competing stores) affect employee theft as measured by inventory shrinkage and cash shortage. Using two store‐level data sets from the convenience store industry, we find that relative wages are negatively associated with employee theft after we control for each store's employee characteristics, monitoring environment, and socio‐economic environment. Moreover, we find that relatively higher wages also promote social norms such that coworkers are less (more) likely to collude to steal inventory from their company when relative wages are higher (lower). Our research contributes to an emerging literature in management control that explores the effect of efficiency wages on employee behavior and social norms.     

Policy uncertainty and peer effects: Evidence from corporate investment in China

This study investigates whether economic policy uncertainty (EPU) magnifies peer effects in corporate investment in China and the economic mechanisms through which EPU may act upon this property. We examine this relationship by analysing a large sample of publicly listed companies in China for the period of 2009–2019, adopting the peer-firm-average idiosyncratic stock return to capture exogenous variations in peer firms’ investment activities. We demonstrate that peer effects are stronger when EPU is increasing in intensity. We also find that high EPU magnifies peer effects by decreasing the accuracy of firms’ signals regarding their investment opportunities, asymmetrically impacting their capacity to acquire information and exacerbating managers’ career concerns. We further show that increased EPU magnifies peer effects only for underinvesting firms, causing underinvestment to persist and retarding recovery from an economic downturn. Our investigation provides original evidence of how EPU influences corporate investment decisions through peer effects, contributing to the continuing debate on the role of EPU and corporate investment efficiency by establishing that the adoption of consistent and transparent economic policies optimize returns on a company’s investments, especially during an economic downturn.     

Benchmarking and Learning in Public Healthcare: Properties and Effects

This research investigates the effects of learning‐oriented benchmarking in public healthcare settings. Benchmarking is a widely adopted yet little explored accounting practice that is part of the paradigm of New Public Management. Extant studies are directed towards mandated coercive benchmarking applications. The present study analyses voluntary benchmarking in a public setting that is oriented towards learning. The study contributes by showing how benchmarking can be mobilised for learning and offers evidence of the effects of such benchmarking for performance outcomes. It concludes that benchmarking can enable learning in public settings but that this requires actors to invest in ensuring that benchmark data are directed towards improvement.     

Corporate tax competition between firms

Firms’ tax planning decisions, similar to their other operational decisions, are made in a competitive environment. Various stakeholders observe the tax payments and evaluate these against the relevant peer group. This implies firms might not simply minimise their tax burden, but also consider their competitors behaviour when deciding about tax planning. Empirically this creates interdependencies in the tax planning activities of firms. Introducing the concept of a reputational loss we show the positive interdependence in a theoretical model and test it in a spatial econometric model. Empirical evidence suggests that benchmarking takes place both within countries and within industries, however for the latter it is important to include firms in large non-EU OECD countries.     

Transfer Price Negotiation in the Presence of Unequal Bargaining Power: The Effect of a Peer Evaluation Scheme on Inter-divisional Profit Distribution

This study examines how managers balance economic incentives and inter-divisional equity considerations during transfer price negotiations. Our experiment shows that both buyers and sellers are willing to give up a significant amount of their profits to pursue a more equitable outcome (one that results in greater inter-divisional profit equalisation). We also find that incorporating peer evaluation schemes into negotiators' formal incentive plans has both economic and social-psychological impacts on negotiation behaviour, resulting in even greater inter-divisional profit equalisation. While this outcome may seem 'fairer' to the individual managers, from the firms' perspective profit equalisation can obscure divisional performance, potentially leading to resource allocation inefficiencies.     

The Attitudes of British National Health Service Managers and Clinicians Towards the Introduction of Benchmarking

This paper describes an empirical study, conducted in three acute hospitals, of the attitudes of central managers, medical managers and clinicians towards the adoption of benchmarking. Benchmarking was portrayed in The New NHS White Paper (1997) as an important means of improving efficiency over the next decade. The present paper examines the context of change and nature of benchmarking. Findings are presented in seven sections including: the understanding which respondents had of benchmarking; their willingness to be involved in benchmarking; the existence of strategies and policies for implementing benchmarking; the relevance of existing costing information; and the role of networks in facilitating benchmarking. The study concludes that the process of change adopted contradicted most of the factors associated with creating receptivity to change. Also, that the publication of the National Reference Costs seemed to have more relevance to resource planning at central National Health Service Management Executive level, than to effecting improvements at operational level in acute hospitals.     

注册制改革会产生溢出效应吗?——基于企业投资行为的视角北大核心

提高资本市场资源配置效率是注册制推行的重要目标之一,本文以此为出发点,构建了多期倍分法(DID)模型,探究了科创板(试点注册制)公司信息披露对同行业公司的溢出效应。研究发现,科创板公司信息披露会促使同行业公司提高研发投入,且该效应随着信息披露内容的丰富、精确度的增加而有所提高。机制分析表明,该溢出效应源自信息不确定性的降低和竞争压力的产生。同时,创板信息披露提高了同行业公司管理层对创新的认知程度以及增加了媒体关注度,进而促进公司研发投入。进一步研究发现,同行业公司研发投入受到正向溢出效应影响的同时,固定资产投入有所降低,投资结构的改变最终导致投资效率提升,显著抑制了过度投资。本文为强制性信息披露的溢出效应研究提供了因果证据,也为注册制改革政策效果的全面评估提供了支持。     

Momentum, Business Cycle, and Time-varying Expected Returns

A growing number of researchers argue that time-series patterns in returns are due to investor irrationality and thus can be translated into abnormal profits. Continuation of short-term returns or momentum is one such pattern that has defied any rational explanation and is at odds with market efficiency. This paper shows that profits to momentum strategies can be explained by a set of lagged macroeconomic variables and payoffs to momentum strategies disappear once stock returns are adjusted for their predictability based on these macroeconomic variables. Our results provide a possible role for time-varying expected returns as an explanation for momentum payoffs.     

Efficiency wages as gift exchange: Evidence from corporate innovation in China

This paper investigates the impact of rank-and-file employees on corporate innovation. We show that paying higher relative wages to rank-and-file employees promotes better innovation outcomes in terms of patent quantity and quality. This effect is more significant among firms with large proportions of skilled employees, industries with high levels of R&D intensity, provinces with competitive local labor markets, and non-SOEs. Further analyses reveal that efficiency wages can serve as an underlying economic channel that fosters innovation by retaining and attracting valuable human capital and stimulating their working enthusiasm. Finally, we show that technological innovation is a mechanism through which rank-and-file employees affect productivity growth and thereby affect the economy.     

CEOs' Outside Employment Opportunities and the Lack of Relative Performance Evaluation in Compensation Contracts

Although agency theory suggests that firms should index executive compensation to remove market‐wide effects (i.e., RPE), there is little evidence to support this theory. Oyer (2004, Journal of Finance 59, 1619–1649) posits that an absence of RPE is optimal if the CEO's reservation wages from outside employment opportunities vary with the economy's fortunes. We directly test and find support for Oyer's (2004) theory. We argue that the CEO's outside opportunities depend on his talent, as proxied by the CEO's financial press visibility and his firm's industry‐adjusted ROA. Our results are robust to alternate explanations such as managerial skimming, oligopoly, and asymmetric benchmarking.     

Resuscitating the wage channel in models with unemployment fluctuations

Higher wages all else equal translate into higher inflation. More rigid wages imply a weaker response of inflation to shocks. This view of the wage channel is deeply entrenched in central banks’ views and models of their economies. In this paper, we present a model with equilibrium unemployment which has three distinctive properties. First, using a search and matching model with right-to-manage wage bargaining a proper wage channel obtains. Second, accounting for fixed costs associated with maintaining an existing job greatly magnifies profit fluctuations for any given degree of wage fluctuations, which allows the model to reproduce the fluctuations of unemployment over the business cycle. And third, the model implies a reasonable elasticity of steady state unemployment with respect to changes in benefits. The calibration of the model implies low profits, but does not require a small gap between the value of working and the value of unemployment for the worker.     

Valuation of American options on foreign currency

Pricing models for American call and put options on foreign currency are derived herein. These models are used to investigate the efficiency of the market for foreign currency options. The evidence presented here indicates that market prices for these options deviate substantially from their corresponding model prices. In addition, it is shown that a hedging strategy executed at transaction prices can be used to translate an observed deviation of market from model prices into positive excess profits. However, these profits are eliminated if the strategy is executed at bid and offer prices.     

Modeling the Impact of Agricultural Growth and Government Policy on Income Distribution in India

This article uses a limited general equilibrium model to investigatethe growth and equity effects of a variety of economic and technicalchanges and selected agricultural policies in India. It exploreshow changes in food prices, rural wages, and farm profits associatedwith the Green Revolution period affected income distributionbetween net buyers and sellers of food. The model shows thatincome gains from the Green Revolution initially accrued tothe wealthier rural groups but that after 1972–73 theywere transferred to urban consumers and that by 1980–81the per capita incomes of poor and wealthier rural groups alikewere barely above their respective 1960–61 levels. Themodel is also used in counterfactual analysis of the impactof changes in technological, demographic, investment, taxation,and income redistribution variables. Its findings indicate theimportance of trade policies for the nature of the equity outcomesfrom agricultural growth and suggest that a reduction in populationgrowth and an increase in nonagricultural employment and incomeare required to convert agricultural growth into reduced ruralpoverty.