Program on Corporate Governance
Harvard Law School
http://www.law.harvard.edu/programs/olin_center/corporate_governance
The Program on Corporate Governance is pleased to announce the recent issuance or publication of the following studies on executive compensation:
Golden Parachutes and the Wealth of Shareholders
Lucian A. Bebchuk, Alma Cohen and Charles C.Y. Wang
How to Fix Bankers' Pay
Lucian A. Bebchuk
Lucky CEOs and Lucky Directors
Lucian Bebchuk, Yaniv Grinstein and Urs Peyer
Below are abstracts of these papers as well as links to them:
Golden Parachutes and the Wealth of Shareholders
Lucian A. Bebchuk, Alma Cohen and Charles C.Y. Wang
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Abstract:
Golden parachutes have attracted much debate and substantial attention from investors and public officials for more than two decades, and the Dodd-Frank Act recently mandated a shareholder vote on any future adoption of a golden parachute by public firms. We use IRRC data for the period 1990-2006 to provide a comprehensive analysis of the relationship that golden parachutes have both with the evolution of firm value over time and with shareholder opportunities to obtain acquisition premiums. We find that golden parachutes are associated with increased likelihood of either receiving an acquisition offer or being acquired, a lower premium in the event of an acquisition, and higher (unconditional) expected acquisition premiums. Tracking the evolution of firm value over time in firms adopting GPs, we find that firms adopting a GP have a lower industry-adjusted Tobin's Q already in the IRRC volume preceding the adoption, but that their value continues to decline during the inter-volume period of adoption and continues to erode subsequently. A similar pattern is displayed by an analysis of abnormal stock returns prior to the adoption of GPs, during the inter-volume period of adoption, and subsequently.
How to Fix Bankers' Pay
Lucian A. Bebchuk
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This essay ? written for a special issue of the American Academy of Arts and Sciences' Daedalus journal on lessons from the financial crisis ? discusses how bankers' pay should be fixed. I describe two distinct sources of risk-taking incentives: first, executives' excessive focus on short-term results; and, second, their excessive focus on results for shareholders, which corresponds to a lack of incentives for executives to consider outcomes for other contributors of capital. I discuss how pay arrangements can be reformed to address each of these problems and conclude by examining the role that government should play in bringing about the needed reforms. The essay provides an accessible summary of the analysis developed in three recent studies:
* Bebchuk and Fried, Paying for Long-Term Performance (University of Pennsylvania Law Review, 2010)
* Bebchuk and Spamann, Regulating Bankers' Pay (Georgetown Law Journal, 2010)
* Bebchuk, Cohen and Spamann, The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008 (Yale Journal on Regulation, 2010)
Lucky CEOs and Lucky Directors
Lucian Bebchuk, Yaniv Grinstein and Urs Peyer
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Abstract:
This paper, featured in this month's issue of the Journal of Finance, integrates and further develops the analysis of two discussion papers we circulated earlier, "Lucky CEOs" and "Lucky Directors." The paper contributes to understanding the corporate governance determinants and implications of backdating practices during the decade of 1996-2005. Overall, our analysis provides support for the view that backdating practices reflected significant governance breakdowns rather than (as some commentators have been arguing) technical accounting violations.
Our analysis focuses on at-the-money "lucky" grants awarded at the lowest price of the grant month. In particular, we find that:
(i) Opportunistic timing of option grants was associated with factors reflecting greater influence of the CEO on corporate decision-making, such as lack of a majority of independent directors, a long-serving CEO, or a lack of a block-holder with "skin in the game" on the compensation committee;
(ii) Grants to independent directors were also opportunistically timed, and this opportunistic timing was not merely a by-product of simultaneous awards to executives or of firms' routinely timing all option grants;
(iii) Lucky grants to independent directors were associated with more CEO luck, tying the interests of directors with executives? benefits from backdating practices;
(iv) Rather than being a substitute for other forms of compensation, gains from opportunistic timing were awarded to CEOs with larger total compensation from other sources;
(v) Opportunistic timing was not driven by habit but rather, for any given firm, the use of such timing was itself timed to increase its profitability for recipients; and
(vi) The odds of a CEO's grant being lucky were significantly higher, controlling for CEO and firm characteristics in our dataset, when a preceding grant to the CEO was lucky as well.
New on the HLS Forum on Corporate Governance and Financial Regulation:
Posts placed during the past ten days include:
Do Investors See Through Mistakes in Reported Earnings?
New SEC Whistleblower Rules Fall Short
Protectionism and Paternalism at the UK Panel on Takeovers and Mergers
Non-binding Voting for Shareholder Proposals
ISS Issues Policy Updates for 2011 Proxy Season
Golden Parachutes and the Wealth of Shareholders
Lucky CEOs and Lucky Directors
The Costs of Intense Board Monitoring
The Case for Professional Boards
Delaware Supreme Court Reverses Chancery Court in Airgas Case
Please visit the Harvard Law School Forum at:
http://blogs.law.harvard.edu/corpgov
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http://blogs.law.harvard.edu/corpgov/announcements
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Received on Tue Dec 14 2010 - 08:24:15 EST
