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on Corporate Finance |
| By: | Jia Chen; Kewei Hou; René M. Stulz |
| Abstract: | Using theories from the behavioral finance literature to predict that investors are attracted to industries with more salient outcomes and that therefore firms in such industries have higher valuations, we find that firms in industries that have high industry-level dispersion of profitability have on average higher market-to-book ratios than firms in low dispersion industries. This positive relation between market-to-book ratios and industry profitability dispersion is economically large and statistically significant and is robust to controlling for variables used to explain firm-level valuation ratios in the literature. Consistent with the mispricing explanation of this finding, we show that firms in less boring industries have a lower implied cost of equity and lower realized returns. We explore alternative explanations for our finding, but find that these alternative explanations cannot explain our results. |
| JEL: | G12 G14 G31 G32 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20880&r=cfn |
| By: | Peter Cziraki; Moqi Xu |
| Abstract: | We use the length of employment contracts to estimate CEO turnover probability and its effects on risk-taking. Protection against dismissal should encourage CEOs to pursue riskier projects. Indeed, we show that firms with lower CEO turnover probability exhibit higher return volatility, especially idiosyncratic risk. An increase in turnover probability of one standard deviation is associated with a volatility decline of 17 basis points. This reduction in risk is driven largely by a decrease in investment and is not associated with changes in compensation incentives or leverage. |
| Keywords: | risk-taking; gambling for resurrection; CEO contracts; CEO turnover |
| JEL: | G34 J41 J63 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:55909&r=cfn |
| By: | Brian Bell; John Van Reenen |
| Abstract: | We analyse the role of financial sector workers in the huge rise of the share of earnings going to those at the very top of the pay distribution in the UK. Rising bankers' bonuses accounted for two-thirds of the increase in the share of the top 1% after 1999. Surprisingly, bankers' share of earnings showed no decline between the peak of the financial boom in 2007 and 2011, three years after the global crisis began. Nor did bankers' relative employment position deteriorate over this period. We discuss proposed policy responses such as transparency, bonus 'clawbacks', numerical bonus targets and tax |
| JEL: | N0 F3 G3 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:56057&r=cfn |
| By: | Daniel Ferreira; David Kershaw; Thomas Kirchmaier; Edmund-Philipp Schuster |
| Abstract: | We propose a management insulation index based on banks’ charter and by-law provisions and on the provisions of the applicable state corporate law that make it difficult for shareholders to oust a bank’s management. We show that banks in which managers were more insulated from shareholders in 2003 were roughly 18 to 26 percentage points less likely to be bailed out in 2008/09. We also find that banks in which the management insulation index was reduced between 2003 and 2006 were more likely to be bailed out. We discuss alternative interpretations of the evidence. The evidence is mostly consistent with the hypothesis that banks in which shareholders were more empowered performed poorly during the crisis. |
| Keywords: | corporate governance; banks bailouts |
| JEL: | F3 G3 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:56083&r=cfn |
| By: | Eddie Gerba |
| Abstract: | Following recent studies by the Bank of England that the low financial market confidence and low expectations about private sector profits over the next three years has lead to unusually low price-to-book ratios, we incorporate a stock market mechanism in a general equilibrium framework. More specifically, we introduce an endogenous wedge between market and book value of capital, and make investment a function of it in a standard financial accelerator model. The price wedge is driven by an information set containing expectations about the future state of the economy. The result is that the impulse responses to exogenous disturbances are on average two to three times more volatile than in the benchmark financial accelerator model. More- over, the model improves the matching of firm variables and financial rates to US data compared to the standard financial accelerator model. We also derive a model based quadratic loss function and measure the extent to which monetary policy can feed a bubble by further loosening the credit market frictions that entrepreneurs face. A policy that explicitly targets stock market developments can be shown to improve welfare in terms of minimizing the consumption losses of consumers, even when we account for incomplete information of central bankers regarding the current state of the economy. |
| Keywords: | asset price cycles; financial friction model; monetary policy; asset price targeting |
| JEL: | E44 E52 G32 |
| Date: | 2013–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:56396&r=cfn |
| By: | David E. Wennberg; Sandra M. Sharp; Gwyn Bevan; Jonathan S. Skinner; Daniel J. Gottlieb; John E. Wennberg |
| Abstract: | Objective:- To compare the performance of two new approaches to risk adjustment that are free of the influence of observational intensity with methods that depend on diagnoses listed in administrative databases. Setting:- Administrative data from the US Medicare program for services provided in 2007 among 306 US hospital referral regions. Design:- Cross sectional analysis. Participants:- 20% sample of fee for service Medicare beneficiaries residing in one of 306 hospital referral regions in the United States in 2007 (n=5 153 877). Main outcome measures:- The effect of health risk adjustment on age, sex, and race adjusted mortality and spending rates among hospital referral regions using four indices: the standard Centers for Medicare and Medicaid Services—Hierarchical Condition Categories (HCC) index used by the US Medicare program (calculated from diagnoses listed in Medicare’s administrative database); a visit corrected HCC index (to reduce the effects of observational intensity on frequency of diagnoses); a poverty index (based on US census); and a population health index (calculated using data on incidence of hip fractures and strokes, and responses from a population based annual survey of health from the Centers for Disease Control and Prevention). Results:- Estimated variation in age, sex, and race adjusted mortality rates across hospital referral regions was reduced using the indices based on population health, poverty, and visit corrected HCC, but increased using the standard HCC index. Most of the residual variation in age, sex, and race adjusted mortality was explained (in terms of weighted R2) by the population health index: R2=0.65. The other indices explained less: R2=0.20 for the visit corrected HCC index; 0.19 for the poverty index, and 0.02 for the standard HCC index. The residual variation in age, sex, race, and price adjusted spending per capita across the 306 hospital referral regions explained by the indices (in terms of weighted R2) were 0.50 for the standard HCC index, 0.21 for the population health index, 0.12 for the poverty index, and 0.07 for the visit corrected HCC index, implying that only a modest amount of the variation in spending can be explained by factors most closely related to mortality. Further, once the HCC index is visit corrected it accounts for almost none of the residual variation in age, sex, and race adjusted spending. Conclusion:- Health risk adjustment using either the poverty index or the population health index performed substantially better in terms of explaining actual mortality than the indices that relied on diagnoses from administrative databases; the population health index explained the majority of residual variation in age, sex, and race adjusted mortality. Owing to the influence of observational intensity on diagnoses from administrative databases, the standard HCC index over-adjusts for regional differences in spending. Research to improve health risk adjustment methods should focus on developing measures of risk that do not depend on observation influenced diagnoses recorded in administrative databases. |
| JEL: | G32 |
| Date: | 2014–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:56671&r=cfn |