This paper summarizes the empirical and theoretical research on executive compensation and provides a comprehensive and up-to-date description of pay practices (and trends in pay practices) for chief executive officers (CEOs). Topics discussed include the level and structure of CEO pay (including detailed analyses of annual bonus plans, executive stock options, and option valuation), international pay differences, the pay-setting process, the relation between CEO pay and firm performance (“pay-performance sensitivities”), the relation between sensitivities and subsequent firm performance, relative performance evaluation, executive turnover, and the politics of CEO pay.

The valuation effect of diversification is examined for large samples of firms in

This paper studies the determinants of executive turnover and firm valuation as a function of ownership and control structure in Italy, a country that features low legal protection for investors, firms with controlling shareholders and pyramidal groups. The results show that firms where the largest shareholders act as top executives, have a firm lock on control and own less than 50 percent of the firm's cash-flow rights exhibit poor governance, as measured by a lower sensitivity of turnover to performance and a lower Q ratio. JEL classification: G34, J63, L14 Keywords: Management turnover, corporate governance, pyramidal groups Author's address: Institute of Finance and Accounting, London Business School, Regent's Park, London NW1 4SA, United Kingdom. E-mail: pvolpin@london.edu. Acknowledgements: Ithank an anonymous referee, Julian Franks, Rafael La Porta, Marco Pagano, Henri Servaes, Andrei Shleifer, and participants at seminars at Harvard University, London Business School and London School of Economics for helpful comments. I also thank Richard Frost and Samanta Padalino for editing suggestions. I acknowledge support from the National Science Foundation Graduate Fellowship program and the JP Morgan Chase Research Fellowship at London Business School. 1 1.

Japan’s prolonged economic problems are due to more than faulty macro-economic policies. We do not deny the importance of bungled macro-economic policy, but argue that deeper maladies in Japanese corporate governance made that country increasingly vulnerable to such problems. We argue that Japan’s main bank and financial keiretsu systems left corporate governance largely in the hands of creditors rather than shareholders. Thus, Japanese governance practices did not assign effective control rights to residual claimants. This, we argue, led to a widespread misallocation of capital that mired Japan in excess capacity and liquidity problems. 1.

We examine how different economies would design an optimal corporate governance system structured from three of the main mechanisms of corporate governance (managerial ownership, monitoring by banks, and disciplining by the takeover market). We allow for interactions among the mechanisms. The first set of results characterizes the combination of governance mechanisms that can appear in any optimally designed structure: 1) when monitored debt appears in an optimal system it is accompanied by concentrated ownership, and 2) when takeovers appear in an optimal system they are accompanied by diffuse ownership. We show that out of the numerous governance structures that could arise from combinations of the governance mechanisms, only three are candidates for an optimal system. These three endogenously derived governance structures match the prevalent systems (family based, bank based and market based) in the world. The optimal system for a given economy is characterized as a function of the degrees of development of its financial institutions and markets. Our analysis yields several testable implications. 1

I test whether corporate governance is ineffective in emerging markets by estimating the link between CEO turnover and firm performance for over 1,200 firms in eight emerging markets. While previous papers on corporate governance in emerging markets have studied corporate governance mechanisms, such as concentrated ownership, I study a corporate governance outcome: are poorly performing managers replaced? Others have answered this question in the affirmative for the United States and other developed countries. This paper is the first to address this question for emerging markets. I find that CEOs of emerging market firms are more likely to lose their jobs when their firm's performance is poor, suggesting that corporate governance is not ineffective in emerging markets. Earnings-based measures of performance have the strongest relationship, and stock-return-based measures the weakest relationship, with CEO turnover in emerging markets. The magnitude of the relationship is surprisingly ...

This paper uses clinical evidence to show how the German system of corporate control and governance is both more active and more hostile than has previously been suggested. It provides a complete breakdown of ownership and takeover defence patterns in German listed companies and finds highly fragmented (but not dispersed) ownership in non-majority controlled firms. We document how the accumulation of hostile stakes can be used to gain control of target companies given these ownership patterns. The paper also suggests an important role for banks in helping predators accumulate, and avoid the disclosure of, large stakes.

* We thank the Corporate Library for providing the director data for this study. We also thank Melissa Boyle for her capable research assistance and workshop participants at UC Berkeley, Il-Horn Hann, and Maria Nondorf for their helpful comments. Does the Market Value Financial Expertise on Audit Committees of Boards of Directors? We examine 3-day cumulative abnormal returns (CARs) around the announcement of 850 newly appointed outside board members assigned to audit committees during 1993-2002, a period prior to the implementation of the Sarbanes-Oxley Act (SOX). Motivated by the SOX requirement that public companies disclose whether they have a financial expert on their audit committee, we test whether the market reacts favorably to the appointment of directors with financial expertise to the audit committee. In addition, because it is controversial whether SOX should define financial experts narrowly to include primarily accounting financial experts (as initially proposed), or more broadly to include non-accounting financial experts (as ultimately passed), we separately examine appointments of each type of expert. We find significantly positive CARs around the appointment of accounting financial

Die Discussion Papers dienen einer möglichst schnellen Verbreitung von neueren Forschungsarbeiten des ZEW. Die Beiträge liegen in alleiniger Verantwortung der Autoren und stellen nicht notwendigerweise die Meinung des ZEW dar. Discussion Papers are intended to make results of ZEW research promptly available to other economists in order to encourage discussion and suggestions for revisions. The authors are solely responsible for the contents which do not necessarily represent the opinion of the ZEW. Firm Leadership and Innovative Performance: Evidence from Seven EU Countries 1 by

Corporate governance mechanisms assure investors in corporations that they will receive adequate returns on their investments (Shleifer and Vishny, 1997, p. 737). If these mechanisms did not exist or did not function properly, outside investors would not lend to firms or buy equity in them. Businesses would be forced to rely entirely on their own internally generated cash flows and accumulated financial resources to finance ongoing operations as well as profitable investment opportunities. Overall economic performance would suffer because many good business opportunities would be missed