Paige Parker Ouimet

Who Works for Startups? The Relation between Firm Age, Employee Age and Growth

We present evidence that young employees are an important ingredient in the creation and growth of firms. Our results suggest that young employees possess attributes or skills, such as willingness to take risk or innovativeness, which make them relatively more valuable in young, high growth, firms. Young firms disproportionately hire young employees, controlling for firm size, industry, geography and time. Young employees in young firms command higher wages than young employees in older firms and earn wages that are relatively more equal to older employees within the same firm. Moreover, young employees disproportionately join young firms that subsequently exhibit higher growth and raise venture capital financing. Finally, we show that an increase in the regional supply of young workers increases the rate of new firm creation. Our results are relevant for investors and executives in young, high growth, firms, as well as policymakers interested in fostering entrepreneurship.

What Motivates Minority Acquisitions? The Trade-Offs between a Partial Equity Stake and Complete Integration

Previous studies document that minority acquisitions help align the incentives of strategic alliance partners and mitigate frictions that arise in customer-supplier relations. However, these same benefits can also be attained with a majority acquisition, suggesting that minority acquisitions are observed when the anticipated costs to acquiring majority control are high. We compare minority and majority acquisitions and find minority acquisitions are more likely when acquiring control is costly due to the dilution of managerial incentives at the target firm and the combination of inefficient internal capital markets. For financially constrained firms, financing needs to obtain the larger stake also favor minority acquisitions. Majority acquisitions are more likely when control is important to enhance joint production efficiencies, increase market power, or provide the acquirer with private benefits of control.Minority acquisitions, involving less than 50% of the target, represent a distinct organizational choice. Minority acquisition can mitigate some of the incentive problems that arise in contractual relationships. Less is known, however, about the trade-off between minority acquisitions and complete integration. We find that minority acquisitions are more common when keeping target managerial incentives intact is important and when the target is financially constrained or can benefit from certification. Minority acquisitions are also more likely when the targets valuation is especially uncertain; integrating internal capital markets will be costly; and consolidating earning will lower earnings per share (EPS). The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Employee Capitalism or Corporate Socialism? Broad-Based Employee Stock Ownership

How employee share ownership plans (ESOPs) affect employee compensation and shareholder value depends on the size. Small ESOPs, defined as those controlling less than 5% of outstanding shares, benefit both workers and shareholders, implying positive productivity gains. However, the effects of large ESOPs on worker compensation and shareholder value are more or less neutral, suggesting little productivity gains. These differential effects appear to be due to two non-value-creating motives specific to large ESOPS: (1) To form management-worker alliances ala Pagano and Volpin (2005), wherein management bribes workers to garner worker support in thwarting hostile takeover threats and (2) To substitute wages with ESOP shares by cash constrained firms. Worker compensation increases when firms under takeover threats adopt large ESOPs, but only if the firm operates in a non-competitive industry. The effects on firm valuation also depend on the strength of product market competition: When the competition is strong (weak), most of the productivity gains accrue to employees (shareholders). Competitive industry also implies greater job mobility within the industry, enabling workers to take a greater portion of productivity gains.

Wage Inequality and Firm Growth

We examine how within-firm skill premia – wage differentials associated with jobs involving different skill requirements – vary both across firms and over time. Our firm-level results mirror patterns found in aggregate wage trends, except that we find them with regard to increases in firm size. In particular, we find that wage differentials between high- and either medium- or low-skill jobs increase with firm size, while those between medium- and low-skill jobs are either invariant to firm size or, if anything, slightly decreasing. We find the same pattern within firms over time, suggesting that rising wage inequality – even nuanced patterns, such as divergent trends in upper- and lower-tail inequality – may be related to firm growth. We explore two possible channels: i) wages associated with “routine�? job tasks are relatively lower in larger firms due to a higher degree of automation in these firms, and ii) larger firms pay relatively lower entry-level managerial wages in return for providing better career opportunities. Lastly, we document a strong and positive relation between within-country variation in firm growth and rising wage inequality for a broad set of developed countries. In fact, our results suggest that part of what may be perceived as a global trend toward more wage inequality may be driven by an increase in employment by the largest firms in the economy.

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.

Within-Firm Pay Inequality

Financial regulators and investors alike have expressed concerns about high pay inequality within firms. This study examines how within-firm pay inequality varies across firms, how it relates to firms’ operating performance and valuations, and whether it is priced by the market. Using a proprietary data set of public and private firms in the UK, we find that pay disparities between top-level jobs – those where managerial skills and responsibility are most important – and bottom-level jobs are increasing in firm size. By contrast, pay differentials between jobs involving either no or only little managerial responsibility are invariant to firm size. Moreover, firms with higher within-firm pay inequality have better operating performance, higher Tobin’s Q, and higher equity returns. Our results support the notion that high pay disparities within firms are a reflection of better managerial talent.

Wages and Firm Performance: Evidence from the 2008 Financial Crisis

We examine the effect of higher wages on firm performance during the 2008 financial crisis. Our sample includes UK firms which signed long-term wage agreements with their employees before September 2008, thereby giving pay raises. Firms covered by binding agreements which extend deep in the crisis paid higher wages but also realized greater ex-post performance measured by sales, sales per employee, profits and market shares, as compared to control firms with agreements overlapping modestly with the crisis. Several robustness tests, including an IV estimation, suggest our results are not driven by factors associated with the timing of the long-term agreement.

Going Entrepreneurial? IPOs and New Firm Creation

We examine the human capital of IPO-filing firms and how going public affects their labor force. IPO-filing firms have high average wages and limited industrial diversification. Moreover, we document that a successful IPO increases departures of high-skilled employees to startups and diversification though employment growth in non-core industries. While IPOs do not significantly affect earnings growth of pre-IPO workers, post-IPO hires receive larger earnings increases upon joining. These results are most consistent with agency mechanisms associated with the transition to public ownership. Overall, going public has significant implications for the firms’ overall labor force, the firm, and labor reallocation.

Investor Experience and Attention: The Effect of Financial Shocks on Individual Trading Decisions

Using unique data on employee ownership plans sponsored by U.S. public companies, we estimate the effects of the 2008 financial crisis on individual investors’ participation and trading decisions. Consistent with a decreased willingness to take risk, we observe an increase in the average propensity to exercise employee stock options following the crisis, controlling for grant timing and moneyness in addition to time-invariant firm and employee characteristics. However, the results are concentrated among employees with limited experience in option plans prior to the pre-crisis run-up in equity prices. Moreover, we find that low-experience employees also increase their participation in employee stock purchase plans (ESPPs) following the shock. Conditional on initiating participation in ESPPs, we find that they are disproportionally likely to sell the acquired shares both immediately and within the first year of ownership. Since declining to participate in an ESPP amounts to leaving money on the table, our results suggest a new wrinkle in our understanding of how investors’ personal return experiences interact with risk preferences. While negative shocks appear to diminish investors’ appetites for risk, they also mitigate investor inattention. Thus, at least along certain dimensions, they can induce investors to make decisions that are closer to the optimum. * Preliminary and incomplete. Do not circulate without the authors’ permission.Using unique data on employee ownership plans sponsored by U.S. public companies, we estimate the effects of the 2008 financial crisis on individual investors’ participation and trading decisions. Consistent with a decreased willingness to take risk, we observe an increase in the average propensity to exercise employee stock options following the crisis, controlling for grant timing and moneyness in addition to time-invariant firm and employee characteristics. However, the results are concentrated among employees with limited experience in option plans prior to the pre-crisis run-up in equity prices. Moreover, we find that low-experience employees also increase their participation in employee stock purchase plans (ESPPs) following the shock. Conditional on initiating participation in ESPPs, we find that they are disproportionally likely to sell the acquired shares both immediately and within the first year of ownership. Since declining to participate in an ESPP amounts to leaving money on the table, our results suggest a new wrinkle in our understanding of how investors’ personal return experiences interact with risk preferences. While negative shocks appear to diminish investors’ appetites for risk, they also mitigate investor inattention. Thus, at least along certain dimensions, they can induce investors to make decisions that are closer to the optimum.

Is Cash Still King: Why Firms Offer Non-Wage Compensation and the Implications for Shareholder Value

Why do firms offer non-wage compensation instead of the equivalent amount in financial compensation? We argue that firms use non-wage benefits, specifically maternity leave, to efficiently target workers with desirable characteristics. Using Glassdoor data, we show that firms offer higher quality maternity benefits in industries and locations where female talent is relatively scarce -- a relationship robust to an instrumental variable analysis. Second, using plausibly exogenous variation in the timing of government policy, we show that these benefits can increase firm value. Third, we document novel stylized facts about non-wage benefits and how they are correlated with firm characteristics.Over the past 40 years, the share of non-wage benefits in employee compensation grew from 5% to 30%. Using disaggregated data from Glassdoor, we first document a series of stylized facts about the availability of non-wage benefits and how these benefits are correlated with firm characteristics. We subsequently test three non-mutually exclusive hypotheses explaining the cross-section of non-wage benefits: (i) tax advantages, (ii) attracting and retaining specific employee groups, and (iii) mitigating the disutility of work. We find empirical evidence in support of all three hypotheses. Moreover, firms with higher rated benefits exhibit larger ex-post equity returns, suggesting that differences in non-cash types of compensation are not fully priced by the market. Affiliations: †Kenan-Flagler Business School, University of North Carolina; ‡Department of Economics, Department of Management Science & Engineering, Stanford University; ∗Sauder School of Business, University of British Columbia. E-mails: timjliu@kenan-flagler.unc.edu, cmakridi@stanford.edu, paige_ouimet@unc.edu, elena.simintzi@sauder.ubc.ca. Acknowledgments: We would like to thank Andrew Chamberlain and Glassdoor for their help with the data.