Harry A. Newman

An analysis of the stock price reaction to sudden executive deaths: Implications for the managerial labor market

Abstract Certain characteristics of managerial employment arrangements and of the managerial labor market make shareholder wealth dependent on an executives continued employment. These wealth effects are investigated by examining the common stock price reaction to unexpected deaths of senior corporate executives. Abnormal stock price changes are documented for a sample of fifty-three events. These abnormal stock price changes are associated with the executives status as a corporate founder and with measures of the executives ‘talents’ and decision-making responsibility, and of the transaction costs associated with renegotiating or terminating the employment agreement.

Does the Composition of the Compensation Committee Influence CEO Compensation Practices

CEOs receive preferential treatment, at the expense of shareholders, when corporate insiders are included on the compensation committee. While CEO compensation is not greater, the relation between CEO compensation and corporate performance is more favorable to the CEO with insiders on the compensation committee when corporate performance is poor.

STRICT LIABILITY IN A PRINCIPAL-AGENT MODEL

Previous analytical work examining strict liability has generally ignored the existence of moral hazard problems within the firm. In this work, the firm has been implicitly modeled as a single individual (for example, Shave11 [1980, 19821, Landes and Posner [ 19811, Polinsky [1980], Polinsky and Rogerson [1983], and Mantel1 [1984]).’ However, it is often the case that an owner of a firm (principal) hires an employee (agent) to perform activities which could result in the harm of a third party. For example, in the recent industrial accident case of the 1984 Bhopal, India gas leak, Union Carbide Corporation had established the subsidiary Union Carbide India Ltd., which in turn hired Indian employees to operate a chemical plant. In general, if the preferences of the agent differ from those of the owner and if the agent’s effort is unobservable, then a moral hazard problem may exist within the firm. This study examines the socially optimal level of care and the care taken under strict liability in the presence of moral hazard through the application of principal-agent economic models.* Since this paper examines environments in which a principal hires an agent to engage in a productive activity, the influence that strict liability has on firm behavior can be analyzed in settings where firm ownership is separated from management (for example, as in the Union Carbide Bhopal, India accident). While previous research has considered the direct influence of liability rules on the care taken by an owner-manager, this paper examines the influence that strict liability

The Impact of Ownership Structure on the Structure of Compensation Committees

The practice of appointing insiders to the compensation committee has drawn considerable criticism since compensation committees play an important role in executive compensation decisions. This paper examines the association between the firms ownership structure and the decision to use insiders on the compensation committee. The paper finds that CEO stock ownership is positively related to the presence of insiders on the compensation committee whereas the stockholdings of non-executive employees, as a group, is negatively related to the presence of insiders. Copyright Blackwell Publishers Ltd 2000.

Disclosure biases in proxy performance graphs: The influence of performance and compensation committee composition

Purpose – The purpose of this paper is to investigate whether proxy statement performance graph disclosures are influenced by the firms governance structure and management concerns about relative performance. Design/methodology/approach – Logistic regression is used to test whether the level of performance graph disclosure decreases with lower relative performance and higher insider director membership on the compensation committee of the board. Also, Z and t-statistics test whether bias in the selected peer group benchmark is related to insider membership on the committee. Findings – The empirical results suggest that reporting discretion was exercised for managements benefit. The amount of explicit disclosure on cumulative returns in the performance graph decreases as relative performance declines and decreases when insider directors serve on the compensation committee. Moreover, the presence of insider directors on the compensation committee is associated with a biased choice of peer group benchmark return. Research limitations/implications – The sample for the study consists of 141 large firms. Future research could examine a larger group of firms that vary in size or other disclosures. Practical implications – These findings support recent actions taken to improve corporate governance. Further public policy steps could be taken. For example, the SEC could require firms to include an explanation for appointing insiders to the compensation committee. Originality/value – The results are consistent with managers using discretion over information disclosures and suggest that compensation committees with insider members play a less active role in providing information that is helpful to shareholders.

Negligence versus strict liability in a principal—Agent model

This study examines the impact of moral hazard on issues concerning a negligence rule versus strict liability. The study finds that when the owner of a firm hires an employee to preside over potentially hazardous activities, different liability rules motivate the owner to induce the employee to exert different levels of care. The results demonstrate that whether greater care in the prevention of industrial accidents is induced by a strict or negligence liability rule depends upon the utility function of the agent and the degree of moral hazard present in the employment relationship. To implement the analysis, the article discusses a mechanism that allows a negligence liability system to be implemented when effort is not observable. Finally, under a negligence rule, both the level of the optimal due care standard and the agents level of accident prevention effort will generally depend on whether moral hazard is present within the firm. These results imply that courts should consider the level of moral hazard within the firm prior to establishing the rule of law that will be employed when assessing liability in the event of an industrial accident.

Influence of TARP regulations on executive compensation plans and corporate governance of ‘exceptional assistance’ recipients

Our article examines proxy statement disclosures to gain insight about the role of the Special Master, the requirement of a risk analysis of compensation plans and the requirement of a provision for compensation clawbacks for firms receiving ‘exceptional assistance’ under the Emergency Economic Stabilization Act of 2008. We examine the only three firms – AIG, Citigroup and Bank of America – that both received exceptional assistance and provided 2010 proxy statements. We find that the Special Master, in his capacity of reviewing and approving compensation payouts and compensation structures as a government representative, mitigated the costs of TARP restrictions by using his discretion to override some restrictions, such as allowing cash compensation in excess of the

Do financial analysts decompose past earnings when making future earnings forecasts

500 000 maximum. We also observe significantly more compensation-related risk disclosures and a greater focus on risk in the design of compensation plans and choice of performance metrics after firms were required to analyze whether compensation plans motivate excessive risk-taking. All three firms appear to acknowledge concerns about their compensation plans, either explicitly by formally stating their concerns or implicitly by adopting new risk-related performance measures. In addition, we note that the amount of disclosure the three firms provide in responding to the same regulations differs significantly. Finally, we find that some firms adopted clawbacks beyond what is required, suggesting that firms find clawbacks beneficial in curbing excessive risk-taking. Our analysis of disclosures suggests that it would be useful for the SEC to review the resulting TARP disclosures as it determines whether such rules would be beneficial to impose on all firms.

Analysis of Corporate Disclosures on Relative Performance Evaluation

Explains why financial analysts could find it useful to separate past earnings into discretionary accruals and earnings before discretionary accruals; referring to related research to develop hypotheses on the effects of both on the change in analysts’ earnings forecasts for the subsequent year. Tests these on a sample of 142 US manufacturing firms and presents the results which suggest that analysts do not decompose past earnings. Discusses three possible interpretations of the results and supports Sloan’s (1996) finding that the capital market does not seem to price accruals rationally.