Edward Dickersin Van Wesep

The Option to Quit: The Effect of Employee Stock Options on Turnover

We show that in the years following a large broad-based employee stock option (BBSO) grant, employee turnover falls at the granting firm. We find evidence consistent with a causal relation by exploiting unexpected changes in the value of unvested options. A large fraction of the reduction in turnover appears to be temporary with turnover increasing in the third year following the year of the adoption of the BBSO plan. The increase three years post-grant is equal in magnitude to the cumulative decrease in turnover over the three prior years, suggesting that long-vesting BBSO plans delay, instead of prevent, turnover.

The Idealized Electoral College voting mechanism and shareholder power

Increasing concern over corporate governance has led to calls for more shareholder in‡uence over corporate decisions, but allowing shareholders to vote on more issues, such as executive compensation, may not affect the quality of governance. We should expect instead that, under current rules, shareholder voting will implement the preferences of the majority of large shareholders and management. This is because majority rule offers little incentive for small shareholders to vote. I offer a potential remedy in the form of a new voting rule, the Idealized Electoral College (IEC), modeled on the American electoral college, that significantly increases the expected impact that a given shareholder has on election. The bene…t of the mechanism is that it induces greater turnout, but the cost is that it sometimes assigns a winner that is not preferred by a majority of voters. Therefore, for issues on which management and small shareholders are likely to agree, majority rule is a superior mechanism for shareholder voting. For issues on which they are likely to disagree, the IEC is superior.

Managerial Ownership and Employee Risk Bearing

Executives who own a stake in the firm that they manage tend to be under-diversified and therefore have an incentive to take real actions to smooth earnings. Using a simple principal-agent model, we show that management will use variable pay to transfer risk to employees. The variability of pay used should be increasing in managerial ownership. We find support for this theory in the data: a ten percent increase in executive ownership translates to a 14 percent increase in the variability of option grants per employee and a three percent increase in the variability in employment. That is, when management ownership is higher, employees have a greater risk of being fired and greater variability in pay. Financing constraints also provide a motivation to shift risk to employees. We find that the effect of such constraints may be felt most by employees not via the mix of compensation elements, but via risk of job loss.

The Quality of Expertise

Policy makers and managers often turn to experts when in need of information, but we should expect experts to be systematically biased. This is because the decision to research a question implies a belief that research will be fruitful. If priors about the impact of ones work are correct on average, then those who choose to research a question are optimistic about the quality of their work. The bias varies predictably with attributes of the question being studied. This fact has implications for a variety of mechanism design applications and yields predictions in accordance with a large literature in psychology. This paper was accepted by Teck-Hua Ho, behavioral economics.

Clarifying by Discretizing

Coarse communication is typically believed to reflect strategic communication. We show that coarseness can also arise when messaging is non-strategic because, while coarse messages are less precise, they are easier to interpret. This implication is consistent with the use of coarse ratings in a wide variety of settings in which strategic concerns may not be first-order, such as debt and stock analyst reports, employee evaluations, referee recommendations, student grades, and Yelp ratings. The theory provides predictions for the distribution of ratings that we see in practice that match stylized facts in a variety of settings. Note: This paper combines material from two prior papers: The Shape of Cooperative Communication and Clarifying by Discretizing.

Why Do We Tenure? Analysis of a Long Standing Risk-Based Explanation

Using a sample of all academics who pass through top 50 economics and finance departments from 1996 through 2014, we study whether the granting of tenure leads faculty to pursue riskier ideas. We use the extreme tails of ex-post citations as our measure of risk and find that both the number of publications and the portion consisting of “home runs�? peak at tenure and fall steadily for a decade thereafter. Similar patterns hold for faculty at elite (top 10) institutions and for faculty who take differing time to tenure. We find the opposite pattern among poorly-cited publications: their numbers rise steadily both pre- and post-tenure.

Short Sales Constraints and the Diversification Puzzle

Building on Millers (1977) short sales constraints insight, we construct a model showing that investors should disagree less about the valuation of a conglomerate than about the valuations of its individual divisions. Disagreement, combined with short sales constraints, increases asset prices and thereby implies a conglomerate discount. The model provides a wide variety of empirically testable implications about the incidence and size of the conglomerate discount. We test several of these predictions, and find that (i) conglomerates face fewer short sales constraints and have less dispersion of opinion than focused firms, and (ii) the conglomerate discount increases with short sales constraints and decreases with differences of opinion. While we are unable to fully explain the conglomerate discount through proxies of short sales constraints and differences of opinion, we find that they reduce its magnitude by between 50-70% using matched sample estimates.

Publicizing Performance

In most employment relationships, the employees performance at the firm is privately, not publicly, observed. Firms can reward successful employees by publicizing their abilities, for example, via a job title, a glowing letter of recommendation, or a resume-worthy award. Firms that establish reputations for hiring young workers and promoting those who succeed lose good workers to competitors but can pay less to young, inexperienced workers in exchange. We find in a general equilibrium setting that firms with reputations for publicizing performance are able to pay less to employees at every level of tenure and thus earn economic profit, but that these firms will never be the most productive in the economy. For such equilibria to exist, the worker--firm match must be important, suggesting that this practice takes place only in human-capital-intensive industries. This paper was accepted by Wei Xiong, finance.