Friday, Jan. 6, 2017 1:00 PM – 3:00 PM
- Chair: Kelly Shue, University of Chicago
Insider Purchases after Short Interest Spikes: A False Signaling Device?
AbstractWe study the information contents of the purchases by corporate insiders when their firms experience sharp increases in short interest. The cumulative abnormal returns associated with these insider purchases increase in the short run but fall back to zero afterwards. This hump-shaped pattern in the cumulative abnormal returns is more pronounced in various situations when insiders have more incentive to engage in false signaling. Insiders incur some trading losses from their purchases. However, these losses are largely outweighed by the benefits they gain from increased compensation and extended tenure. Our results suggest corporate insiders, provided with the right incentive, can strategically use open market purchases to boost stock prices, which may lead to disruption of market efficiency.
Performance-Vesting Provisions in Executive Compensation
AbstractThe usage of performance vesting (p-v) equity awards to top executives in large US companies has grown from 20 to 70 percent from 1998 to 2012. We assess the implications of these increasingly complex awards by examining the accuracy of and biases in disclosure and the connection between the structure of executive pay, risk-taking incentives, and firm risk. To do so, we develop and implement new methods that empirically quantify the significant effects of p-v provisions on the value, delta, and vega of equity-based compensation. We find large biases in the value of executive compensation reported in company disclosures. The elasticity of reported value in economic value is far less than one, with additional bias downward (upward) for large institutional ownership (when the firm uses a high-market-share compensation consultant). Our analysis empirically reaffirms the presence of a causal relation in both the time series and cross section between compensation convexity and firm risk.
The Value of Information for Contracting
AbstractMore precise information reduces contracting costs, but is costly. This paper uses an optimal contracting model to study how contracts change with information precision, allowing us to quantify the cost savings and identify where information is most valuable. One application is to employment, where the optimal contract is an option. The direct effect of reducing signal volatility is a fall in the option's value, which benefits the principal. The indirect effect is a change in effort incentives. If the original option is sufficiently out-of-the-money (the agency problem is weak), the agent can only beat the strike price if he exerts effort and there is a high noise realization. Thus, a fall in volatility reduces effort, lowering the value of information and potentially justifying pay-for-luck. In contrast, standard option theory suggests that lower volatility has greatest effect for at-the-money options, i.e. moderate agency problems. A second application is to financing, where the optimal contract is debt. The model has implications for when monitoring by the lender is most valuable, and for a firm's ability to raise external financing.
- G3 - Corporate Finance and Governance