nep-cfn New Economics Papers
on Corporate Finance
Issue of 2011‒10‒22
two papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Industrial Structure, Executives' Pay And Myopic Risk Taking By John Thanassoulis
  2. Dividend Announcements Reconsidered - Dividend Changes versus Dividend Surprises By Christian Andres; André Betzer; Inga van den Bongard; Christian Haesner; Erik Theissen

  1. By: John Thanassoulis
    Abstract: This study outlines a new theory linking industrial structure to optimal employment contracts and value reducing risk taking. Firms hire their executives using optimal contracts derived within a competitive labour market. To motivate effort firms must use some variable remuneration. Such remuneration introduces a myopic risk taking problem: an executive would wish to inflate early expected earnings at some risk to future profits. To manage this some bonus pay is deferred. Convergence in size amongst the largest firms makes the cost of managing the myopic risk taking problem grow faster than the cost of managing the moral hazard problem. Eventually the optimal contract jumps from one achieving zero myopic risk taking to one tolerating the possibility of myopic risk taking. Under some conditions the industry partititions: the largest firms hire executives on contracts tolerant of myopic risk taking, smaller firms ensure myopia is ruled out.
    Keywords: Myopic risk taking, Moral hazard, Compensation, Bonuses, Bankers' pay, Tail risk, Industrial structure
    JEL: G21 G34
    Date: 2011
  2. By: Christian Andres (WHU – Otto Beisheim School of Management); André Betzer (University of Wuppertal); Inga van den Bongard (University of Mannheim); Christian Haesner (WHU – Otto Beisheim School of Management); Erik Theissen (University of Mannheim)
    Abstract: This paper reconsiders the issue of share price reactions to dividend announcements. Previous papers rely almost exclusively on a naive dividend model in which the dividend change is used as a proxy for the dividend surprise. We use the difference between the actual dividend and the analyst consensus forecast as obtained from I/B/E/S as a proxy for the dividend surprise. Using data from Germany, we find significant share price reactions after dividend announcements. Once we control for analysts’ expectations, the dividend change loses explanatory power. Our results thus suggest that the naive model should be abandoned. We use panel methods to analyze the determinants of the share price reactions. We find (weak) support in favor of the dividend signaling hypothesis and no support for either the free cash flow hypothesis or the rent extraction hypothesis.
    Keywords: Dividend Announcements, Market Efficiency, Ownership Structure, Agency Theory
    JEL: G35 G34
    Date: 2011–10

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