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.

By examining how executive compensation structure determines corporate acquisition decisions, we document a strong positive relation between acquiring managers' equity-based compensation (EBC) and stock price performance around and following acquisition announcements. This relation is highly robust when we control for acquisition mode (mergers), means of payment, managerial ownership, and previous option grants. Compared to low EBC managers, high EBC managers pay lower acquisition premiums, acquire targets with higher growth opportunities, and make acquisitions engendering larger increases in firm risk. EBC significantly explains post-acquisition stock price performance even after controlling for acquisition mode, means of payment, and “glamour ” versus “value ” acquirers.

In this paper, we analyse the short-term wealth effects of large (intra)European takeover bids. We find large announcement effects of 9 % for target firms and a cumulative abnormal return that includes the price run-up over the two-month period prior to the announcement date of 23%. However, the share price of the bidding firms reacts positively with a statistically significant announcement effect of only 0.7%. We also show that the status of a takeover bid has a large impact on the short-term wealth effects of target’s and bidder’s shareholders, with hostile acquisitions triggering substantially larger price reactions than friendly mergers and acquisitions. When a UK target or bidder is involved, the abnormal returns are almost twice as high as bids involving both a Continental European target and bidder. We also find strong evidence that cash offers trigger much larger share price reactions than all-equity offers or combined bids consisting of cash, equity and loan notes. A high market-to-book ratio of the target leads to a higher bid premium, but triggers a negative price reaction for the bidding firm. Also, our results suggest that bidding firms should not diversify by acquiring target firms that do not match their core

This study provides evidence regarding the risk-subsidy and monitoring hypotheses by investigating the relation between insider ownership and risk-taking in the property-liability insurance industry. The structure of guaranty

JEL Classification: G32 © 2001 SUERF, Vienna

Abstract not found

Using responses to a well-known confidential survey, we study corporations ’ use of derivatives to “take a view ” on interest rate and currency movements. Characteristics of speculators suggest that perceived information and cost advantages lead them to take positions actively; that is, they do not speculate to increase risk by “betting the ranch. ” Speculating firms encourage managers to speculate through incentivealigning compensation arrangements and bonding contracts, and they use derivativesspecific internal controls to manage potential abuse. Finally, we examine whether investors reading public corporate disclosures are able to identify firms that indicate speculating in the confidential survey; they are not. DERIVATIVE INSTRUMENTS CAN BE USED TO HEDGE market risk exposures or to speculate on movements in the value of the underlying asset. To hedge generally implies that the derivative position is taken with the intention of reducing risk. To speculate generally implies that the derivative position is undertaken with the primary intention of making a profit or increasing risk. Speculation has a

The views expressed in this paper are ours alone and do not necessarily reflect the views of the Reserve Bank of Australia. We are grateful to Warren Tease, Gordon de Brouwer and participants at seminars at the Reserve Bank of Australia and the The 1980s witnessed large increases in corporate debt and sustained asset price inflation. More recently, asset prices, particularly commercial property prices, have fallen significantly. The effect of these changes on balance sheets, and their implications for the business cycle, have generated considerable interest among academics and policy makers. In this paper, we review recent theoretical models that link the evolution of the business cycle to changes in firm equity. This link arises out of the asymmetry of information between borrowers and lenders and between managers and owners. These asymmetries lead to distortions in decision making which affect both the supply of and demand for credit, and ultimately investment and output. Deteriorations in the net worth of corporations and financial institutions are likely to lead to a reduction in both credit demand and supply and to

We propose a continuous time utility maximization model to value stock and option compensation from the executive’s perspective. We allow the executive to invest non-option wealth in the market and riskless asset but not in the company stock itself. This enables executives to adjust exposure to market risk, but they are subject to firm-specific risk for incentive purposes. Since the executive is risk averse, this unhedgeable firm risk leads them to place less value on the options than their cost to the company, given by their market or Black Scholes value. By distinguishing between these two types of risks, we are able to examine the effect of stock volatility, firm-specific risk, and market risk on the value to the executive. Executives do not necessarily want to increase stock volatility, as their risk aversion can outweigh the option’s convexity effect. Firm-specific risk generally reduces option value, although if market risk is held fixed and the options are out-of-the-money it is possible for the reverse to hold. Generally, market risk has a positive effect on option value. An implication of the model is that the Black Scholes formula exaggerates the incentives for the executive to increase the company stock price. We examine the relationship between risk and optimal incentives, and find firm-specific risk decreases optimal incentives (regardless

this paper is to extend Dann's (1981) study by examining the types of firms that employ a cash repurchase of their common stock and to find out the underlying motivations behind such an announcement. In particular, the differences in stockholder returns among companies with three different types of ownership structures are examined; namely, managercontrolled, owner-managed, and externally-controlled firms. Manager-controlled firms are those where no one individual shareholder or group of shareholders owns more than 5% of the company's shares. An owner-managed firm is one where one or more shareholders owning 5% or more of the firm's common stock are also managers or directors of the firm. Externally-controlled firms have at least 5% of their stock owned by an outsider (non-manager), a trust fund, or another 2