Anand Venkateswaran

Do Better-Connected CEOs Innovate More?

We present evidence suggesting that chief executive officer (CEO) connections facilitate investments in corporate innovation. We find that firms with better-connected CEOs invest more in research and development and receive more and higher quality patents. Further tests suggest that this effect stems from two characteristics of personal networks that alleviate CEO risk aversion in investment decisions. First, personal connections increase the CEO’s access to relevant network information, which encourages innovation by helping to identify, evaluate, and exploit innovative ideas. Second, personal connections provide the CEO with labor market insurance that facilitates investments in risky innovation by mitigating the career concerns inherent in such investments.

How Mad Is Mad Money? Jim Cramer as aStock Picker and Portfolio Manager

This article examines a widely popular and controversial source of investment advice: buy and sell recommendations made by Jim Cramer on his popular nightly Mad Money show on CNBC. The results show that Cramer’s recommendations impact share prices of the companies that he mentions. The effects are short-lived and reverse for buy recommendations, although they persist for sell recommendations. Returns for a portfolio of Cramer recommendations are significantly different from zero for some subperiods. Factor analysis suggests that these returns are driven by beta exposure, smaller stocks, growth-oriented stocks, and momentum effects. Overall performance is average after adjusting for factor exposures. Further analysis indicates a significant cluster of new or updated analysts’ ratings of stocks just before and just after a Cramer recommendation. The results provide insights into the performance of a popular but controversial market pundit and should be of interest to followers and detractors seeking to develop an active, or alpha-generating, investment strategy.

Project Characteristics, Incentives, and Team Production

We develop a model to show how agency conflicts, free-rider effects, and monitoring costs interact to affect optimal team size and workers’ incentive contracts. Team size increases with project risk, decreases with profitability, and decreases with monitoring costs as a proportion of output. Our predictions are consistent with empirical evidence that firm-specific risk has increased over time, average corporate earnings have declined, and firms’ organizational structures have also flattened. The predicted effects of monitoring costs on team size are supported by evidence that improvements in information technology likely to lower monitoring costs lead to larger teams. Further, firms with relatively more intangible assets, where monitoring costs are likely to be higher, are smaller. Optimal incentive intensities decrease with risk and increase with profitability. The endogenous determination of team size accentuates the positive effects of a decline in risk and an increase in profitability on incentives. This paper was accepted by Gustavo Manso, finance.

The Determinants and Effects of CEO–Employee Relative Pay

We study the determinants and effects of the relative compensation of top executives and lower-level employees. First, we show that CEO–employee pay ratio depends on the balance of power between the CEO (relative to the board) and ordinary employees (relative to management). Second, our results suggest that employees do not perceive higher pay ratios as an inequitable outcome to be redressed via costly behaviors that lower productivity. We do not find a negative relation between relative pay and employee productivity, either in the full sample or in subsamples where employees are well-informed about executive pay and are protected against retaliatory managerial actions. Rather, we find that productivity increases with relative pay when the firm has fewer employees who are well-informed, and when promotion decisions are predominantly merit-based. We also find that firm value and operating performance both increase with relative pay. We conclude that ordinary employees appear to perceive an opportunity in higher pay ratios but the extent to which such perception incentivizes them depends on the likelihood of success in a promotion tournament.

Merger Spillovers in Collaborative Partnerships

We examine whether a firm in a collaborative partnership experiences spillover effects from the merger of its partner with a third firm. We find that merger announcement return to the non-merging partner is positive. Its match-adjusted sales growth and operating income in the year following the merger are also positive. Further tests suggest that the spillover effects arise from increased synergies created by the merger for the non-merging partner. Other potential sources of merger spillover effects including the relaxation of financial constraints and an increased likelihood that the non-merging partner will subsequently become a takeover target appear to be less important.

Project Characteristics, Organizational Structure, and Managerial Incentives

We develop a model to show how agency conflicts between shareholders and managers, information processing and learning about project quality, manager synergies and bargaining power interact to affect a firms internal organizational structure and the incentive compensation structures of its managers. Our theory provides a novel explanation for two empirical regularities; firms typically have pyramidal organizational forms; and the pay-performance sensitivities of managers increase with their hierarchical level. We also derive a number of implications that relate the risk and profitability of a firms pool of projects to its internal organization and the incentives of its managers. (i) The optimal breadth of a firms organization increases with the risk of the firms projects. (ii) The optimal height of the organization declines with risk and increases with profitability. (iii) The pay-performance sensitivities of top managers increase with profitability. (iv) The optimal height and breadth decrease with managerial bargaining power. Broadly, our study contributes to the literature on the theory of the internal organization of firms by providing insights into the organization of managers or decision-makers within firms, and the design of their incentives.