Transparency and incentives among peers

This article studies the effect of transparency among peers on the principal's cost of providing incentives. Using directed graphs to represent peer information, we show that under complementarity the cost of providing incentives is decreasing with the level of transparency within the organization. We also investigate the role of the architecture of the information in boosting incentives. In arguing that substitution impedes the benefits of transparency, we will compare function‐based teams with process‐based teams, showing that the latter are more effective in providing incentives.     

Robust Financial Contracting and the Role of Venture Capitalists

We derive a role for inside investors, such as venture capitalists, in resolving various agency problems that arise in a multistage financial contracting problem. Absent an inside investor, the choice of securities is unlikely to reveal all private information, and overinvestment may occur. An inside investor, however, always makes optimal investment decisions if and only if he holds a fixed-fraction contract, where he always receives a fixed fraction of the project's payoff and finances that same fraction of future investments. This contract also eliminates any incentives of the venture capitalist to misprice securities issued in later financing rounds.     

Work‐related perks,agency problems,and optimal incentive contracts

Work‐related perks, such as corporate jets, nice offices, and so forth, improve the tradeoff between incentives and insurance that determines the optimal incentive contract. We show that (i) such perks may be offered even if their direct consumption benefits are offset by their costs; (ii) they will be offered for free; (iii) agents in more uncertain production environments will receive more perks; (iv) senior executives should receive more perks; and (v) better corporate governance can lead to more perk consumption by CEOs. Our analysis also offers insights into firms' decisions about how much autonomy they should grant to their employees.     

高管激励及其制度挤出

基于经济人自利偏好的激励契约会对公司高管的内在激励产生挤出效应。激励契约的挤出效应根本上是源于委托人面对未来或然事件带给当事人效用的影响没有把握,由此释放出的不信任信号刺激了代理人对等的不信任,从而形成制度挤出。根据信任博弈模型分析发现,在经济组织中利益相关方主动构建在个人关系、制度上的相互信任关系,并形成信任、互惠公平的制度环境,是高管激励契约有效实施的基础。     

Information and delay in an agency model

This article studies how delay in contracting depends on an exogenous signal. The agent whose cost is his private information may produce in the first period or be delayed until the second period. A signal about the cost of the agent is available between the two periods. The quality of the good can vary; in the benchmark case of no signal, the principal offers the standard Baron‐Myerson contract and there is no delay. Delay is determined by the considerations at the margin and may increase or decrease with a better signal. The value of information can be negative, as a better signal may aggravate the principal's commitment problem. A better signal may also increase the agent's rent and decrease social welfare.     

Retirement Behaviour in Austria: Effects of Incentives on Old‐Age Labour Supply

We provide an extensive analysis of retirement behaviour in Austria with a special focus on the role of incentives delivered by the tax and benefit system in determining individual retirement decisions. A comprehensive microsimulation model of the Austrian pension system is applied to calculate retirement benefit entitlements and forward‐looking incentive measures (social security wealth, accrual rate, peak and option values) on an individual basis. We use the calculated incentive measures as the main explanatory variables in probit models to explain retirement decisions. We base our microsimulation and estimations on an extensive administrative Austrian data set. These data contain information on more than 300,000 new retirees from the period 2001–11. We provide robust evidence that incentive measures are well suited to explaining individual retirement decisions.     

Managerial Incentives for Short-term Results

Of late, concern has been expressed that American managers tend to make decisions that yield short-term gains at the expense of the long-term interests of the shareholders. In this paper, we have attempted to investigate managerial incentives for such decisions. We find that, when the manager has private information regarding his or her decisions, there exist situations wherein the manager has incentives to make decisions which yield short-term profits but are not in the stockholders best interests. This incentive for suboptimal decisions arises because the manager, by taking decisions yielding short-term profits, hopes to enhance his reputation earlier, thus boosting his wages. We also find that this incentive is inversely related to her experience, the duration of her contract, and the risk of the firm.     

Uniform Versus Discretionary Regimes in Reporting Information with Unverifiable Precision and a Coordination Role

We examine uniform and discretionary regimes for reporting information about firm performance from the perspective of a standard setter, in a setting where the precision of reported information is difficult to verify and the reported information can help coordinate decisions by users of the information. The standard setter's task is to choose a reporting regime to maximize the expected decision value of reported information for all users at all firms. The uniform regime requires all firms to report using the same set of reporting methods regardless of the precision of their information, and the discretionary regime allows firms to freely condition their sets of reporting methods on the precision of their information. We show that when unverifiable information precision varies across firms and users' decisions based on reported information have strong strategic complementarities, a uniform regime can have a beneficial social effect as compared to a discretionary reporting regime. Our analysis generates both normative and positive implications for evaluating the necessity and effectiveness of reporting under standards.     

An empirical analysis of the effects of monitoring intensity on the relation between equity incentives and earnings management

Prior studies suggest that equity incentives inherently have both an interest alignment effect and an opportunistic financial reporting effect. Using three distinct proxies for earnings management we find evidence consistent with the incentive alignment (opportunistic financial reporting) effect of equity incentives increasing as monitoring intensity increases (decreases). Furthermore, using the accrual-based earnings management and meet/beat analyst forecast models we find that the opportunistic financial reporting effect of equity incentives dominates the incentive alignments effect for firms with low monitoring intensity. Using proxies for real earnings management, we find that the incentive alignment effect dominates the opportunistic financial reporting effect for high and moderate monitoring intensity firms. However, for low monitoring intensity firms the opportunistic reporting effect mitigates, but does not completely offset, the benefits of the incentive alignment effect. Overall, these findings are consistent with the level of monitoring affecting the relation between equity incentives and earnings management.     

Why and how firms use operating cash flow in compensation**

This study considers the choice of operating cash flow (OCF) in contracts and further examines the sensitivity of the CFO's and CEO's compensation to OCF performance, conditional on our stylized indicator of the importance of working capital management (WCM). The analysis depicts OCF as conveying distinct information about WCM, and predicts that firms for which WCM is an important source of value are more likely to contract on OCF. The importance of WCM is instrumented by firm conditions that create strong demand for WCM, including large working capital, rapid growth in working capital, highly volatile working capital, and large debt relative to total assets. Using a sample of firms whose incentive plans explicitly include OCF measures and a control sample of firms without such plans, we show that all four indicators of the importance of WCM have positive association with the likelihood of contracting upon OCF, individually and collectively. In compensation regressions, we find that WCM importance has a pronounced positive effect on the weight of OCF, but muted effect on the weight of accrual earnings. The results suggest that firms include measures of OCF performance in contracts largely to provide incentives for WCM and internal cash generation.     

Subjective Performance Indicators and Discretionary Bonus Pools

Key indicators of managerial performance are frequently subjective, that is, they are difficult to specify and/or verify for contracting purposes. When a principal must rely on subjective information to create incentives for a group of agents, discretionary bonus pools are shown to be optimal mechanisms. Despite their optimality, however, discretionary bonus pools entail an additional agency cost relative to the benchmark of optimal contracts based on objective and verifiable information. Our analysis identifies circumstances under which this additional agency cost is small, for example, the subjective information signals are precise, or the number of agents participating in the bonus pool increases. When incentive schemes can be based on both objective and subjective performance indicators, the relative weights to be placed on alternative signals are shown to differ from the ones predicted by models with objective signals only. We also demonstrate that correlation in measurement errors has a different impact on the structure of optimal incentive schemes when the performance indicators are merely subjective.     

Net neutrality and investment incentives

This article analyzes the effects of net neutrality regulation on investment incentives for Internet service providers (ISPs) and content providers (CPs), and their implications for social welfare. Concerning the ISPs' investment incentives, we find that capacity expansion decreases the sale price of the priority right under the discriminatory regime. Thus, contrary to ISPs' claims that net neutrality regulations would have a chilling effect on their incentive to invest, we cannot dismiss the possibility of the opposite. A discriminatory regime can also weaken CPs' investment incentives because of CPs' concern that the ISP would expropriate some of the investment benefits.     

How Disaggregation Enhances the Credibility of Management Earnings Forecasts

An important problem facing managers is how to enhance the credibility, or believability, of their earnings forecasts. In this paper, we experimentally test whether a characteristic of a management earnings forecast—namely, whether it is disaggregated—can affect its credibility. We also test whether disaggregation moderates the relation between managerial incentives and forecast credibility. Disaggregated forecasts include an earnings forecast as well as forecasts of other key line items comprising that earnings forecast. Our results indicate that disaggregated forecasts are judged to be more credible than aggregated ones and that disaggregation works to counteract the effect of high incentives. We also develop and test an original model that explains how disaggregation positively impacts three factors that, in turn, influence forecast credibility: perceived precision of management's beliefs, perceived clarity of the forecast, and perceived financial reporting quality. We show that forecast disaggregation works to remedy incentive problems only via its effect on perceived financial reporting quality. Overall, our study adds to our understanding of how managers can credibly communicate their expectations about the future to market participants.     

CONVERTIBLE DEBT AND INVESTMENT INCENTIVES

In this paper we examine the effect of convertible debt on the investment incentives facing stockholders. The effect depends critically on the value of existing assets relative to the firm's investment requirements. With a restrictive dividend covenant, convertible debt mitigates the overinvestment incentive associated with risky debt but exacerbates the underinvestment incentive at higher values of existing assets. A less-restrictive dividend covenant exacerbates overinvestment under straight debt financing but reduces the underinvestment incentive induced by the conversion feature. In this context, a convertible debt contract with a less-restrictive dividend covenant maximizes firm value.     

Accounting Discretion in Fair Value Estimates: An Examination of SFAS 142 Goodwill Impairments

This study examines Statement of Financial Accounting Standards 142 adoption decisions, focusing on the trade‐off between recording certain current goodwill impairment charges below the line and uncertain future impairment charges included in income from continuing operations. We examine several potentially important economic incentives that firms face when making this accounting choice. We find evidence suggesting that firms' equity market concerns affect their preference for above‐the‐line vs. below‐the‐line accounting treatment, and firms' debt contracting, bonus, turnover, and exchange delisting incentives affect their decisions to accelerate or delay expense recognition. Our study contributes to the accounting choice literature by examining managers' use of discretion when adopting a mandatory accounting change and by developing and testing explicit cross‐sectional hypotheses of the determinants of firms' preferences for immediate below‐the‐line versus delayed above‐the‐line expense recognition.     

期权激励与企业并购行为

本文以2006年至2015年我国上市公司为研究对象,考察了期权激励对企业并购行为的影响。研究发现:授予高管的期权激励显著提升了企业发起并购的可能性和并购规模。缓解代理问题和提升风险承担是潜在的作用渠道。进一步研究表明,激励对象异质性会影响期权激励的效果,期权激励对企业并购倾向和并购规模的提升作用在管理者年龄较高、管理者任期较长以及管理者相对薪酬水平较低的企业中更加明显。此外,期权激励对企业并购行为的影响在非国有企业中更加突出。最后,本文还发现期权激励提升了企业并购的财务业绩。本文的研究不仅丰富了有关期权激励效果方面的文献,而且对于理解企业并购行为具有一定的参考意义。     

The incentive to give incentives: On the relative seniority of debt claims and managerial compensation

We show that the relative seniority of debt and managerial compensation has important implications for the design of remuneration contracts. Whereas the traditional literature assumes that debt is senior to remuneration, there are in reality many cases in which remuneration contracts are de facto senior to debt claims in financially distressed firms and in workouts. We theoretically show that risky debt changes the incentive to provide the manager with performance-related incentives (a “contract substitution” effect). In other words, the relative degree of seniority of managers’ claims and creditors’ claims in case a bankruptcy procedure starts is crucial to determine the optimal incentive contract ex-ante. If managerial compensation is more senior than debt, higher leverage leads to lower power incentive schemes (lower bonuses and option grants) and a higher base salary. In contrast, when compensation is junior, we expect more emphasis on pay-for-performance incentives in highly-levered firms.     

Investor pricing of CEO equity incentives

The main purpose of this paper is to explore CEO compensation in the form of stock and options. The objective of CEO compensation is to better align CEO-shareholder interests by inducing CEOs to make more optimal (albeit risky) investment decisions. However, recent research suggests that these incentives have a significant down-side (i.e., they motivate executives to manipulate reported earnings and lower information quality). Given the conflict between the positive CEO-shareholder incentive alignment effect and the dysfunctional information quality effect, it is an open empirical question whether CEO equity incentives increase firm value. We examine whether CEO equity incentives are priced in the firm-specific ex ante equity risk premium over the 1992–2007 time period. Our analysis controls for two potential structural changes over this time period. The first is the 1995 Delaware Supreme Court ruling which increased protection from takeovers (and decreased risk) for Delaware incorporated firms. The second is the 2002 Sarbanes–Oxley Act which impacted corporate risk taking, equity incentives, and earnings management. Collectively, our findings suggest that CEO equity incentives, despite being associated with lower information quality, increase firm value through a cost of equity capital channel.     

Environmental Regulations and Social Norms

The evidence suggests that a surprisingly large number of firms comply with pollution standards even though expected penalties for non-compliance are quite low. This paper establishes an environmental social norm model that embodies collective environmental actions among firms. It provides a plausible explanation for these puzzling empirical findings. In this social norm framework, we also explore how the extrinsic pricing incentive affects the intrinsic environmental morale among firms. By taking into account the crowding-out effect of pricing incentives, we show that pollution taxes may not be an effective tool in fighting pollution.     

Cost engineering and costing in Hawthorn Leslie Shipbuilders, 1886–1915

This research examines cost engineering and costing in a British shipbuilding firm in the late nineteenth – early twentieth century. The firm maintained separate systems of contract accounting, costing and reporting for directors and employed internal data from these systems in performance measurement, the development of managerial incentives and the enforcement of managerial accountability. An apparent gap in the information required to manage the firm in a cyclical and highly competitive industry during a period of rapid organisational and technological change was filled by an informal and personal cost engineering system developed by the shipbuilding manager. The shipbuilding manager's cost engineering system employed a wide range of both internal and external data for use in cost management and in cost estimation, pricing and tendering. Thus cost engineering and costing developed to serve different purposes and developed in different spheres and along different trajectories.