John E. Thanassoulis

Industry Structure, Executive Pay, and Short-Termism

This study outlines a new theory linking industry structure to optimal employment contracts and executive short-termism. Firms hire their executives using optimal contracts derived within a competitive labour market. To motivate effort, firms must use some variable remuneration. Such remuneration introduces a myopia problem: an executive would wish to inflate early expected earnings at some risk to future profits. To manage this short-termism, some bonus pay is deferred. Convergence in size among firms makes the cost of managing the myopia problem grow faster than the cost of managing the effort problem. Eventually, the optimal contract jumps from one deterring myopia to one tolerating myopia. Under some conditions, the industry partitions: the largest firms hire executives on contracts tolerant of myopia; smaller firms ensure myopia is ruled out. This paper was accepted by Wei Xiong, finance.

Is Multimedia Convergence to be Welcomed

This paper considers the consumer implications of the process of convergence across multimedia and telecoms markets. Convergence starts when one firm begins to sell products in hitherto separate horizontal markets competing against rivals active in just one or another of the markets. Convergence creates a strategic link between the markets which alters the price levels, creates the possibility of bundle prices, and creates winners and losers in the population. Partial convergence (e.g., a merged provider of telephony and internet services vs. independent sellers of telephony or internet broadband) lowers prices in the less competitive sector, raises them in the more competitive sector and raises the total prices paid by consumers active in both sectors as compared to the counter-factual of no convergence. Full convergence (e.g., multiple firms offering TV and internet bundles) leads to deep discounts for bundle purchases but no reductions in stand alone prices paid by consumers in only one of the converging sectors. The bundle on bundle competition is so fierce that profits for all converging firms are reduced compared to the counter-factual of partial convergence.

Competition in Posted Prices With Stochastic Discounts

We study price competition between firms over public list or posted prices when a fraction of consumers can subsequently receive discounts with some probability. Such stochastic discounts are a feature of markets in which some consumers bargain explicitly and of markets in which sellers use the marketing practice of couponing. Even though bargainers receive reductions off the posted prices, the potential to discount dampens competitive pressure in the market, thus raising all prices and increasing profits. Welfare falls because of the stochastic nature of the discounts, which generates some misallocation of products to consumers. Stochastic discounts facilitate collusion by reducing the market share that can be gained from a deviation.

Bankers' Pay and Excessive Risk

This paper studies the agency problem between bank management, shareholders, and the taxpayer. Executive bonuses increase in the probability the bank is too big to fail. Bank management recognise it is very likely optimal to select risky projects which exploit the taxpayer, implying project selection effort (eg due diligence) is more expensive to incentivise. This agency problem leads to too much risk for society, not for shareholders. Compensation rules aimed at solving management-shareholder agency problems — equity pay, deferred, including debt — do not correct the excessive risk taking. By contrast, malus and clawbacks can incentivise the bank management to make better risk choices.

Stock Selling During Takeovers

Stock sales during takeover negotiations weaken the target Boards ability to recommend against the takeover, i.e., to resist. Sophisticated shareholders therefore face a coordination problem when deciding whether to sell-out early; and their actions generate a feedback loop between trading volumes and takeover outcomes. Bidding firms, anticipating the pressurising effect of future share sales on the target Board, may reduce their bids. We study these tensions theoretically. We find that increasing the influence of shareholders during the bidding process lowers equilibrium bids; elongates the bidding process; but raises the overall probability of bid acceptance; and raises expected premia for unsophisticated shareholders.

How to Attract and Retain Short-Term and Long-Term Blockholding Stakes

I ask why the same large shareholders, i.e. blockholders, have different investment horizons. Using the U.S. data for 1998-2013, I examine four fundamental firm policies and characteristics for their potential influence on blockholders’ investments with different time horizons. The panel OLS, logistic and dynamic GMM regression analyses reveal that blockholders adopt a short-term horizon in smaller firms with a less independent board, high leverage and high dividends while the same blockholders keep their investments longer in firms with a more independent board and low dividends. Under various economic conditions, different firm characteristics gain importance in blockholders’ decision on short-term versus long-term investments.

Ethical standards and cultural assimilation in financial services

We study a firm with ethical employees who can adopt a profitable working practice that may harm their customers. Their response to this dilemma reflects their compensation contract as well as their ethical willpower. We identify optimal compensation contracts under utilitarian and deontological (duty-based) ethical standards. With utilitarian employees, and irrespective of employee willpower, a profit maximising firm with sophisticated customers generates the ethically best outcome. Organizational culture emerges as an equilibrium phenomenon. If the firm is a partnership, if sales commissions are hidden, or if customers are naive the firm may use bonuses to create a culture of malpractice.