Robert Daines

The Good, the Bad and the Lucky: CEO Pay and Skill

CEO compensation varies widely, even within industries. In this paper, we investigate whether differences in skill explain these differences in CEO pay. Using the idea that skilled CEOs should be more likely to continue prior good performance and more likely to reverse prior poor performance, we develop a new methodology to detect whether skill is related to pay. We find that highly paid CEOs are more skilled than their less well paid peers when pay is performancebased and when there is a large shareholder. This detected link between pay and skill is strong even when we examine industry-wide declines: highly paid CEOs are more likely to reverse the firms fortunes. We also examine CEO turnovers and show that the firms post-turnover performance is related to differences between the two CEOs pay levels. These results highlight conditions where pay and skill are linked, and hence identify firms where high pay appears to have no justification.

Mandatory Disclosure, Asymmetric Information and Liquidity: The Impact of the 1934 Act

We study the effect of the Securities Exchange Act of 1934 on common stock bid-ask spreads and other information measures. Among other things, the 1934 Act mandated a complete, audited income statement and balance sheet. Prior to the 1934 Act, some firms disclosed sales or depreciation, and some chose not to. Some firms reported audited financials; some did not. If disclosures and audits reduce information asymmetries, the 1934 Act should have a differential effect across these stocks. We find that a firms disclosure status in 1933 has little to do with the evolution of its information measures. Overall, we find that cross-sectional differences in mandatory disclosure had little measurable effect on the degree of information asymmetry.

Right on Schedule: CEO Option Grants and Opportunism

In the wake of the backdating scandal, many firms began awarding options at scheduled times each year. Scheduling option grants eliminates backdating, but creates other agency problems. CEOs that know the dates of upcoming scheduled option grants have an incentive to temporarily depress stock prices before the grant dates to obtain options with lower strike prices. We provide evidence that in recent years some CEOs manipulate stock prices to increase option compensation. We document negative abnormal returns before scheduled option grants and positive abnormal returns after the grants. These returns are explained by measures of a CEOs incentive and ability to influence stock price. We document several mechanisms CEOs use to lower the strike price, including changing the substance and timing of the firms disclosures.