K. J. Martijn Cremers

The CEO Pay Slice

We investigate the relationship between the CEO Pay Slice (CPS) – the fraction of the aggregate compensation of the top-five executive team captured by the CEO – and the value, performance, and behavior of public firms. The CPS may reflect the relative importance of the CEO as well as the extent to which the CEO is able to extracts rents. We find that, controlling for all standard controls, CPS is negatively associated with firm value as measured by industryadjusted Tobins Q. CPS also has a rich set of relations with firms‘ behavior and performance: in particular, CPS is correlated with (i) lower (industry-adjusted) accounting profitability, (ii) lower stock returns accompanying acquisitions announced by the firm and higher likelihood of a negative stock return accompanying such announcements, (iii) higher odds of the CEO receiving a ―lucky‖ option grant at the lowest price of the month, (iv) lower performance sensitivity of CEO turnover, and (v) lower stock market returns accompanying the filing of proxy statements for periods where CPS increases. Taken together, our results are consistent with the hypothesis that higher CPS is associated with agency problems, and indicate that CPS can provide a useful tool for studying the performance and behavior of firms.

Governance Mechanisms and Bond Prices

We investigate the effects of shareholder governance mechanisms on bondholders and document two new findings. First, the impact of shareholder control (proxied by large institutional blockholders) on credit risk depends on takeover vulnerability. Shareholder control is associated with higher (lower) yields if the firm is exposed to (protected from)takeovers. In the presence of shareholder control, the difference in bond yields due to differences in takeover vulnerability can be as high as 66 basis points. Second, event risk covenants reduce the credit risk associated with strong shareholder governance. Therefore, without bond covenants, shareholder governance and bondholder interests diverge.A control device for varying the ratio of a hydrostatic transmission or torque converter in response to changes in the load and speed of the prime mover during the transmission. The device senses the load by sensing changes in the vacuum of the intake manifold and senses the speed by utilizing a gear pump driven by the prime mover with the output of the gear pump being modified to correspond to the power curve of the prime mover by either pressure relief means or use of a cam system. The sensed conditions of speed and load are utilized to provide a combined signal to operate a servo which makes adjustments in the ratio of the transmission. In several embodiments, the output of the combined signal is applied to a pilot spool of the servo device through a bar linkage which also is part of the throttle linkage so that changes in load and speed of the prime mover during operation will cause adjustments in the throttle setting.

Staggered Boards and Firm Value, Revisited

This paper revisits the association between firm value (as proxied by Tobins Q) and whether the firm has a staggered board. As is well known, in the cross-section firms with a staggered board tend to have a lower value. Using a comprehensive sample for 1978-2011, we show an opposite result in the time series: firms that adopt a staggered board increase in firm value, while de-staggering is associated with a decrease in firm value. We further show that the decision to adopt a staggered board seems endogenous, and related to an ex ante lower firm value, which helps reconciling the existing cross-sectional results to our novel time series results. To explain our new results, we explore potential incentive problems in the shareholder-manager relationship. Short-term oriented shareholders may generate myopic incentives for the firm to underinvest in risky long-term projects. In this case, a staggered board may helpfully insulate the board from opportunistic shareholder pressure. Consistent with this, we find that the adoption of a staggered board has a stronger positive association with firm value for firms where such incentive problems are likely more severe: firms with more R&D, more intangible assets, more innovative and larger and thus likely more complex firms.

Multifactor Efficiency and Bayesian Inference

This paper reinvestigates the performance of risk-based multifactor models. In particular, we generalize the Bayesian methodology of Shanken (1987b) and Kandel, McCulloch and Stambaugh (1995) from mean-variance efficiency to the ICAPM notion of multifactor efficiency. This methodology uses informative priors and provides a flexible framework to deal with the severe small sample problems that arise when estimating performance measures. We also introduce and theoretically justify a new inefficiency metric that measures the maximum correlation between the market portfolio and any multifactor efficient portfolio, which is used in conjunction with three other existing inefficiency measures. Finally, we present new empirical evidence that neither the two additional Fama-French (1992) factors nor the momentum factor move the market portfolio robustly closer to being multifactor efficient or robustly decrease pricing errors relative to the CAPM.