Baylor University Roundtable on The Corporate Mission, CEO Pay, and Improving the Dialogue with Investors

A small group of academics and practitioners discusses four major controversies in the theory and practice of corporate finance:

• • What is the social purpose of the public corporation? Should corporate managements aim to maximize the profitability and value of their companies, or should they instead try to balance the interests of their shareholders against those of “stakeholder” groups, such as employees, customers, and local communities?
• • Should corporate executives consider ending the common practice of earnings guidance? Are there other ways of shifting the focus of the public dialogue between management and investors away from near-term earnings and toward longer-run corporate strategies, policies, and goals? And can companies influence the kinds of investors who buy their shares?
• • Are U.S. CEOs overpaid? What role have equity ownership and financial incentives played in the past performance of U.S. companies? And are there ways of improving the design of U.S. executive pay?
• • Can the principles of corporate governance and financial management at the core of the private equity model—notably, equity incentives, high leverage, and active participation by large investors—be used to increase the values of U.S. public companies?

     

A play-the-winner-type urn design with reduced variability

We propose a new adaptive allocation rule, the drop-the-loser, that randomizes subjects in the course of a trial comparing treatments with dichotomous outcomes. The rule tends to assign more patients to better treatments with the same limiting proportion as the randomized play-the-winner rule. The new design has significantly less variable allocation proportion than the randomized play-the-winner rule. Decrease in variability translates into a gain in statistical power. For some values of success probabilities the drop-the-loser rule has a double advantage over conventional equal allocation in that it has better power and assigns more subjects to the better treatment. Acknowledgments. I thank Stephen Durham, the associate editor, and the referees for their helpful suggestions.     

R. J. Chambers on Securities and Obscurities: Making a Case for the Reform of the Law of Company Accounts in the 1970s

This study examines the contribution of Raymond J. Chambers to the British inflation accounting debate in the early‐to‐mid 1970s, from the perspective of the reception of his book, Securities and Obscurities: A Case for Reform of the Law of Company Accounts, published in 1973. To structure the empirical narrative, drawing on previously unpublished documents from the R. J. Chambers Archives, we employ Czarniawska and Joerges’ ( 1996 ) notion of the ‘travel of ideas’, and Mumford’s ( 1979 ) observation of the existence of ‘inflation accounting debate cycles’. The result is a narrative that traces the environmental and material circumstances that led to Chambers’ book having a lesser impact on the British inflation debate than one would expect based on the international exposure of his ideas, his influence at the time, and the empirical rigour of his proposal. The purpose of this exercise is to assess how contextual factors, such as the choice of publisher, use of promotional material, and distribution methods, can be as (or more) important than the substance of the proposed ideas, arguments, and solutions.     

Concavity of utility,concavity of welfare,and redistribution of income

The marginal social value of income redistribution is understood to depend on both the concavity of individuals’ utility functions and the concavity of the social welfare function. In the pertinent literatures, notably on optimal income taxation and on normative inequality measurement, it seems to be accepted that the role of these two sources of concavity is symmetric with regard to the social concern about inequality in the distribution of income. Direct examination of the question, however, reveals that this is not the case. Concavity of utility has a simple, direct effect on the marginal social value of redistribution, as might be expected, whereas concavity of the social welfare function has a more subtle influence, one that in some cases may not be very significant. The implications of this difference are examined for some standard forms of utility and welfare functions, including particular versions that appear in the optimal income taxation literature.     

What moves housing markets: A variance decomposition of the rent–price ratio

We apply the dynamic Gordon growth model to the housing market in 23 US metropolitan areas, the four Census regions, and the nation from 1975 to 2007. The model allows the rent–price ratio at each date to be split into the expected present discounted values of rent growth, real interest rates, and a housing premium over real rates. We show that housing premia are variable and forecastable and account for a significant fraction of rent–price ratio volatility at the national and local levels, and that covariances among the three components damp fluctuations in rent–price ratios. Thus, explanations of house-price dynamics that focus only on interest rate movements and ignore these covariances can be misleading. These results are similar to those found for stocks and bonds.     

Prudent expectations equilibrium in economies with uncertain delivery

In an economy with private information, we introduce the notion of objects of choice as lists of bundles out of which the market selects one for delivery. This leads to an extension of the model of Arrow–Debreu that is used to study trade ex ante with private state verification. Under the assumption that agents are prudent, equilibrium is characterized by the fact that agents consume bundles with the same utility in states that they do not distinguish. This is a weaker condition than the restriction of equal consumption imposed by Radner (Econometrica 36(1), 31–58, 1968), therefore, some no trade situations are avoided and the efficiency of trade increases.     

Pacifying monogamy

This paper proposes a theory of institutionally imposed monogamy. In a society where many women are allocated to the elite, there are high returns for the non-elite men to rebel. Monogamy, or “constrained” polygyny, can pacify non-elite men, and thus serve the elite’s reproductive interests. The more unequal is the society, the stricter constraints the elite want to impose on themselves. This suggests how monogamy might have arisen in response to rising class cleavages, e.g., in the wake of the introduction of agriculture. Another result is that, if the elite can write a law that commits not only themselves but also any group that would come to replace them in a rebellion, then polygyny will be more constrained than if they cannot. We speculate that the Church in Europe may have facilitated the imposition of such binding constraints.     

Membership patterns in USDAW 1980–1990: survival as success?

This research note examines the pattern of union membership growth in USDAW during 1980 to 1990. The union's recruitment strategies, campaigns at local and national level, and the effect of changes in the labour market such as recent equal value judgements are examined with respect to changes in membership levels.     

Does European development have Roman roots? Evidence from the German Limes

This paper contributes to the understanding of the long-run consequences of Roman rule on economic development. In ancient times, the area of contemporary Germany was divided into a Roman and a non-Roman part. The study uses this division to test whether the formerly Roman part of Germany are more developed than the non-Roman part. This is done using the Limes Germanicus wall as geographical discontinuity in a regression discontinuity design framework. The results indicate that economic development—as measured by luminosity—is indeed significantly and robustly larger in the formerly Roman part of Germany. The study identifies the persistence of the Roman road network until the present as an important factor causing this developmental advantage of the formerly Roman part of Germany both by fostering city growth and by allowing for a denser road network.