Ernst G. Maug

Ownership Structure and the Life-Cycle of the Firm: A Theory of the Decision to Go Public

This paper presents a theory of initial public offerings based on the idea that the optimal ownership structure of a company changes over the life cycle of the firm. Insiders take the company public when they have lost the comparative advantage over outsiders in gathering information to evaluate the firms growth prospects. The size of the share sold to the public depends on the relative abilities of the market and insiders to gather this information and on the frictions in the going-public process. Intermediaries help to reduce these frictions and lead to a more efficient allocation if IPOs are conducted more frequently. Discrimination between different classes of investors may be beneficial. Learning by the market about projects in a new industry can lead to a clustering of new issues (hot issue markets). JEL Classification: G24, G32.

Indexing Executive Compensation Contracts

We analyze the efficiency of indexing executive pay by calibrating the standard model of executive compensation to a large sample of US CEOs. The main finding is that benefits from indexing stock options are small and that fully indexing them would increase compensation costs by more than 50% for plausible scenarios. We show analytically that indexing the strike price of stock options to the stock market induces four different adjustments relative to standard options, which simultaneously affect the risk-sharing and incentive properties of the contract; theoretically, the overall effect is ambiguous. Calibration analysis shows that indexing is generally inefficient, because it destroys incentives for almost all CEOs except those of high-beta, high-volatility firms. This result also applies to a scenario in which CEOs can extract rents. An important implication of our findings is that the prevalence of “pay for luck�? in observed equitybased compensation contracts can be explained by the fundamental trade-off between risk and incentives. Standard proposals to index contracts would often not improve the efficiency of compensation.

Two-Class Voting: A Mechanism for Conflict Resolution?

We discuss two-class voting procedures where voters are divided into classes and a separate majority is required in each class. Examples include Chapter 11 bankruptcy proceedings and some political mechanisms. We investigate how voting mechanisms aggregate information dispersed among voters when voters have conflicts of interests as well as different information regarding a proposal. We find that two-class voting provides a significant improvement over one-class voting in all situations where voters have significant conflicts of interests, and where the voters are relatively evenly divided between interest groups. However, two-class voting is inefficient absent conflicts of interests.

The Impact of Firm Prestige on Executive Compensation

We show that CEOs of prestigious firms earn less. Total compensation is on average 8% lower for firms listed in Fortunes ranking of Americas most admired companies. We suggest that CEOs are willing to trade off status and career benefits from working for a publicly admired company against additional monetary compensation. Our identification strategy is based on matched sample analyses, difference-in-differences regressions, and a regression discontinuity design. We perform several robustness checks and exclude many alternative explanations, including that firm prestige just proxies for better corporate governance, or for increased exposure of the pay-setting process to media attention.

Labor Representation in Governance as an Insurance Mechanism

We hypothesize that labor participation in governance helps improve risk sharing between employees and employers. It provides an ex-post mechanism to enforce implicit insurance contracts protecting employees against adverse shocks. Results based on German establishment-level data show that skilled employees of firms with 50% labor representation on boards are protected against layoffs during adverse industry shocks. They pay an insurance premium of 3.3% in the form of lower wages. Unskilled blue-collar workers are unprotected against shocks. Our evidence suggests that workers capture all the gains from improved risk sharing, whereas shareholders are no better or worse off than without codetermination.

The Relative Performance Puzzle

The accepted theoretical models of executive compensation contracts all seem to imply that optimal remuneration packages should contain a relative performance element. The puzzle is that the empirical literature has found remarkably little relative performance evaluation. This paper aims at resolving this puzzle by introducing the notion that the manager can trade on assets other than her own company’s stock. Then the manager’s portfolio strategy always adjusts for the risks of her compensation contract and she replaces the firm’s benchmark with a “home-made” benchmark. She chooses exactly the weights and the compensation of the benchmark that would otherwise be chosen in an optimal contract. In many cases this is possible without short selling any assets. To the extent that performance benchmarks are correlated with traded assets they are redundant for the optimal contract. Accounting benchmarks are exempt from this verdict since they may help to insure the manager against risks that are not related to traded assets. This may help to understand the presence of relative performance elements in annual bonus plans.

Stock Repurchases and Liquidity

We analyze the impact of share repurchases on liquidity based on a new comprehensive data set of realized share repurchases in the US, which covers 50,204 repurchase months between 2004 and 2010. Using instrumental variable analysis, we show that repurchases unequivocally improve liquidity and suggest that endogenous controls have confounded results in earlier studies. Liquidity also influences how firms execute repurchase programs. Repurchases provide liquidity when other investors sell the firms stock or in times of crisis. No evidence exists that firms reduce liquidity when they trade on private information.

Why votes have value: Instrumental voting with overconfidence and overestimation of others' errors

We perform an experiment in which subjects bid for participating in a vote. The setting precludes conflicts of interests or direct benefits from voting. The theoretical value of participating in the vote is therefore zero if subjects have only instrumental reasons to vote and form correct beliefs. Yet, we find that experimental subjects are willing to pay for the vote and that they do so for instrumental reasons. The observed voting premium in the main treatment is high and can only be accounted for if some subjects either overestimate their pivotality or do not pay attention to pivotality at all. A model of instrumental voting, which assumes that individuals are overconfident and that they overestimate the errors of others, is consistent with results from treatments that make the issue of pivotality salient to experimental subjects.

Why Votes have a Value

We perform an experiment where subjects bid for the right to participate in a vote and where the theoretical value of the voting right is zero if subjects are fully rational. We find that experimental subjects are willing to pay for the right to vote and that they do so for instrumental reasons. A model of instrumental voting behavior is consistent with our results if individuals are overconfident, overestimate the errors of other players, and also overestimate how often they themselves are pivotal for the outcome. Eliciting beliefs about pivotality shows that individuals value the right to vote more, the more they overestimate their probability of being pivotal. Eliciting beliefs about pivotality reduces the willingness to pay for the right to vote.

Corporate Finance in Europe: A Survey

We survey research on corporate finance in Europe. The ambition is to provide the reader with an overview of what we learned, particularly since the beginning of the 1990s. We focus on two themes: (1) the practice and institutions in Europe are heterogeneous and different from those in the United States, and we identify areas where the gap seems to be narrowing; (2) we wish to draw some more general conclusions with respect to the law and finance paradigm that has dominated recent research on comparative institutional analysis, and the diversity of European institutions seems to present an ideal testing ground for this approach. We find that the ability of the law and finance approach to capture the relevant differences within Europe is often limited. We focus in particular on equity primary markets;privatizations; cross-listings; capital structure and payout policy; mergers and acquisitions; business groups, pyramids and dual class shares; and valuation and the cost of capital.