Reward for Luck in a Dynamic Agency Model

Hoffmann, Florian; Pfeil, Sebastian

doi:10.1093/rfs/hhq062

Cited by 69 publications

(27 citation statements)

References 12 publications

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“…Dye (1992) and Gopalan, Milbourn, and Song (2010) argue that not indexing an executive to industry performance induces him to choose the …rm's industry exposure optimally. In Ho¤mann and Pfeil (2010), a positive shock indicates high future pro…tability and makes termination more ine¢ cient. As a result, the optimal contract o¤ers the CEO higher promised utility, thus rewarding him for luck.…”

Section: Relative Performance Evaluation: Theorymentioning

confidence: 99%

Executive Compensation: A Survey of Theory and Evidence

Edmans¹,

Gabaix²,

Jenter³

2017

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This paper reviews the theoretical and empirical literature on executive compensation. We start by presenting data on the level of CEO and other top executive pay over time and across firms, the changing composition of pay; and the strength of executive incentives. We compare pay in U.S. public firms to private and non-U.S. firms. We then critically analyze three non-exclusive explanations for what drives executive pay -shareholder value maximization by boards, rent extraction by executives, and institutional factors such as regulation, taxation, and accounting policy. We confront each hypothesis with the evidence. While shareholder value maximization is consistent with many practices that initially seem inefficient, no single explanation can account for all facts and historical trends; we highlight major gaps for future research. We discuss evidence on the effects of executive pay, highlighting recent identification strategies, and suggest policy implications grounded in theoretical and empirical research. Our survey has two main goals. First, we aim to tightly link the theoretical literature to the empirical evidence, and combine the insights contributed by all three views on the drivers of pay. Second, we aim to provide a user-friendly guide to executive compensation, presenting shareholder value theories using a simple unifying model, and discussing the challenges and methodological issues with empirical research. JEL-Codes: D310, D860, G340, M120. Terms of use: Documents in

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Section: Relative Performance Evaluation: Theorymentioning

confidence: 99%

Executive Compensation: A Survey of Theory and Evidence

Edmans¹,

Gabaix²,

Jenter³

2017

SSRN Journal

View full text Add to dashboard Cite

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“…Our model differs in that it (i) features only a finite number of arrivals, (ii) the arrival of a breakthrough is "good news", and (iii) we consider the case in which arrivals are unobservable to the principal. Several other recent papers that involve observable Poisson arrivals include Hoffmann and Pfeil (2010), Piskorski andTchistyi (2011), DeMarzo et al (2014). Given the multistage setting, a key difference in this paper is that the agent's continuation utility is not a sufficient state variable.…”

Section: Related Literaturementioning

confidence: 99%

Breakthroughs, Deadlines and Self-Reported Progress: Contracting for Multistage Projects

Green

Taylor

2015

SSRN Journal

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We study the optimal incentive scheme for a multistage project in which the agent privately observes intermediate progress. The optimal contract involves a soft deadline wherein the principal guarantees funding up to a certain date -if the agent reports progress at that date, then the principal gives him a relatively short hard deadline to complete the project -if progress is not reported at that date, then a probationary phase begins in which the project is randomly terminated at a constant rate until progress is reported. Self-reported progress plays a crucial (but non-stationary) role in implementation. We explore several variants of the model with implications for optimal project design. In particular, we show that the principal benefits by imposing a small cost on the agent in order to submit a progress report or by making the first stage of the project somewhat "harder" than the second. On the other hand, the principal does strictly worse by impairing the agent's ability to observe his own progress.JEL Classification: J41, L14, M55, D82

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“…In general, the methods used in this paper were developed in Sannikov (2007) He and Krishnamurthy (2012), Homann and Pfeil (2010) and Piskorski and Tchistyi (2010), Piskorski and Westereld (2011), among others.…”

Section: Literature Reviewmentioning

confidence: 99%

Volatility smirk as an externality of agency conflict and growing debt

Jaskowski

McAleer

2015

Int J of Economic Theory

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Since the work of Black in the mid‐1970s, the source of the stock market volatility smirk has remained controversial. The volatility smirk is a side effect of agency conflict, and occurs in the optimum, even after resolving the agency conflict. The slope of the smirk increases with the severity of the initial agency conflict between management and investors. It is predicted that the higher is the compensation of the manager, the steeper is the volatility smirk, for both time series and cross‐sections of companies. These results help to disentangle the leverage effect from alternative explanations such as volatility feedback, time‐varying risk premium, and down‐market effects.

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Reward for Luck in a Dynamic Agency Model

Cited by 69 publications

References 12 publications

Executive Compensation: A Survey of Theory and Evidence

Executive Compensation: A Survey of Theory and Evidence

Breakthroughs, Deadlines and Self-Reported Progress: Contracting for Multistage Projects

Volatility smirk as an externality of agency conflict and growing debt

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