Seoyoung Kim

What Makes a Winner? Quantifying Luck in Sustained Performance

This study is an empirical examination of the extent to which either managerial skill or random external influences — i.e., luck — are responsible for firm performance. To adjudicate between the respective theoretical claims, we examine how much of the observed cross-sectional dispersion of outcomes can be attributed to differences in luck rather than differences in skill. Using a unique empirical strategy of bootstrap simulations that we compare to the observed results of public companies, we demonstrate that a substantial portion of performance variation depends on random influences rather than on managerial skill. Specifically, our results show that we can expect to observe substantial differences in realized (i.e., actual) performance outcomes even if all CEOs in a given sample are equally skilled, thus suggesting that the true underlying differences in CEO skill are substantially smaller than implied by simply looking at the raw difference in performance outcomes. Our results not only assist researchers in interpreting firm outcomes but also inform ideas of executive pay and responsibility.This study is an empirical examination of the extent to which luck can explain sustained performance. Using a unique empirical strategy of bootstrap simulations that we compare to actual performances of public companies, we observe that over 95% of the differences in performance outcomes between “top” versus “average” performers can be attributed to luck, even if all CEOs are equally skilled. Through this novel empirical approach, we can better incorporate the role of luck into studies of sustained performance, and our findings suggest that more attention should be placed on the role of unanticipated and even uncontrollable changes on performance.

Credit Spreads with Dynamic Debt

This paper extends the baseline Merton (1974) structural default model, which is intended for static debt spreads, to a setting with dynamic debt, where leverage can be ratcheted up as well as written down through pre-specified exogenous policies. We provide a different and novel solution approach to dynamic debt than in the extant literature. For many dynamic debt covenants, ex-ante credit spread term structures can be derived in closed-form using modified barrier option mathematics, whereby debt spreads can be expressed using combinations of single barrier options (both knock-in and knock-out), double barrier options, double-touch barrier options, in-out barrier options, and one-touch double barrier binary options. We observe that debt principal swap down covenants decrease the magnitude of credit spreads but increase the slope of the credit curve, transforming downward sloping curves into upward sloping ones. On the other hand, ratchet covenants increase the magnitude of ex-ante spreads without dramatically altering the slope of the credit curve. These covenants may be optimized by appropriately setting restructuring boundaries, which entails a trade-off between the reduction in spreads against restructuring costs. Overall, explicitly modeling this latent option to alter debt leads to term structures of credit spreads that are more consistent with observed empirics.

Do players perform for pay? An empirical examination via NFL players’ compensation contracts

How to properly compensate and incentivize players is an important question in the realm of professional sports, and more broadly, is a central question in contract design. With the increasing use of performance-based compensation packages and tax law favoring such compensation design, a natural question arises as to whether workers do indeed perform for pay. We examine this question in a setting that is not fraught with the typical measurement and identification problems found in many pay-performance settings. Specifically, we examine changes in a NFL players Win Probability Added (WPA) and Expected Points Added (EPA) in response to his compensation-contract design. Overall, our paper provides evidence that players do indeed perform for (properly designed) pay, and has important implications for future work on compensation and incentive-based contract design.

Managing Rollover Risk with Capital Structure Covenants in Structured Finance Vehicles

Rollover Risk and Capital Structure Covenants in Structured Finance Vehicles The shadow banking system comprises special purpose vehicles (SPVs) characterized by high debt, illiquid long-maturity assets funded predominantly by short-maturity debt, and tranched liabilities also known as the capital structure of the SPV. These three features lead to an adversarial game among senior-note holders, who solve for an optimal rollover policy based on the other senior tranches with varying rollover dates. This rollover policy is, in turn, taken into account by capital-note holders (i.e., investors in the equity tranche) when choosing the capital structure (i.e., the assets-to-debt ratio) of the SPV. Rollover risk increases in the number of time tranches, resulting in a lower equilibrium (optimal) level of debt and higher cost of debt. The expected life of the SPV may also be shortened. We propose a covenant-based capital structure that mitigates these problems and is Paretoimproving for equity and debt holders in the SPV.

Dynamic Systemic Risk Networks: A Note

We propose a theory-driven framework for monitoring system-wide risk. Our approach extends the one-firm Merton (1974) credit risk model to a generalized stochastic network-based framework across all financial institutions, comprising a novel approach to measuring systemic risk over time. We develop four desired properties for any systemic risk measure. We also develop measures for the risks created by each individual institution and a measure for risk created by each pairwise connection between institutions. Four specific implementation models are then explored, and brief empirical examples illustrate the ease of implementation of these four models and show general consistency between their results.

Zero-Revelation RegTech: Detecting Risk through Linguistic Analysis of Corporate Emails and News

In this paper, we demonstrate how an applied linguistics platform may be used to parse corporate email content and news to assess factors predicting escalating risk or the gradual shifting of other critical characteristics within the firm before they are eventually manifested in observable data and financial outcomes. We find that email content and news articles meaningfully predict increased risk and potential malaise. We also find that other structural characteristics, such as the average email length, are strong predictors of risk and subsequent performance. We present implementations of three spatial analyses of internal corporate communication, i.e., email networks, vocabulary trends, and topic analysis. Overall, we propose a RegTech solution by which to systematically and effectively detect escalating risk or potential malaise without the need to manually read individual employee emails.

What Makes a Winner? Toward Resolving the Role of Luck and Skill in Sustained CEO Performance

This study is an empirical examination of the extent to which either managerial skill or random external influences — i.e., luck — are responsible for firm performance. To adjudicate between the respective theoretical claims, we examine how much of the observed cross-sectional dispersion of outcomes can be attributed to differences in luck rather than differences in skill. Using a unique empirical strategy of bootstrap simulations that we compare to the observed results of public companies, we demonstrate that a substantial portion of performance variation depends on random influences rather than on managerial skill. Specifically, our results show that we can expect to observe substantial differences in realized (i.e., actual) performance outcomes even if all CEOs in a given sample are equally skilled, thus suggesting that the true underlying differences in CEO skill are substantially smaller than implied by simply looking at the raw difference in performance outcomes. Our results not only assist researchers in interpreting firm outcomes but also inform ideas of executive pay and responsibility.This study is an empirical examination of the extent to which luck can explain sustained performance. Using a unique empirical strategy of bootstrap simulations that we compare to actual performances of public companies, we observe that over 95% of the differences in performance outcomes between “top” versus “average” performers can be attributed to luck, even if all CEOs are equally skilled. Through this novel empirical approach, we can better incorporate the role of luck into studies of sustained performance, and our findings suggest that more attention should be placed on the role of unanticipated and even uncontrollable changes on performance.

'I Meant to Do That': Evaluating Luck versus Skill in Firm Performance

This study is an empirical examination of the extent to which either managerial skill or random external influences — i.e., luck — are responsible for firm performance. To adjudicate between the respective theoretical claims, we examine how much of the observed cross-sectional dispersion of outcomes can be attributed to differences in luck rather than differences in skill. Using a unique empirical strategy of bootstrap simulations that we compare to the observed results of public companies, we demonstrate that a substantial portion of performance variation depends on random influences rather than on managerial skill. Specifically, our results show that we can expect to observe substantial differences in realized (i.e., actual) performance outcomes even if all CEOs in a given sample are equally skilled, thus suggesting that the true underlying differences in CEO skill are substantially smaller than implied by simply looking at the raw difference in performance outcomes. Our results not only assist researchers in interpreting firm outcomes but also inform ideas of executive pay and responsibility.This study is an empirical examination of the extent to which luck can explain sustained performance. Using a unique empirical strategy of bootstrap simulations that we compare to actual performances of public companies, we observe that over 95% of the differences in performance outcomes between “top” versus “average” performers can be attributed to luck, even if all CEOs are equally skilled. Through this novel empirical approach, we can better incorporate the role of luck into studies of sustained performance, and our findings suggest that more attention should be placed on the role of unanticipated and even uncontrollable changes on performance.

Directors' Decision-Making Involvement on Corporate Boards

Using the full set of committee memberships for the directors of Fortune 100 firms (which I collect from annual proxy statements), I introduce a measure to capture the extent of a director’s involvement in discussion and decisions that affect corporate strategy. I document substantial variation in directors’ decision-making involvement both within and across boards, and I provide evidence that this more nuanced yet systematically available measure yields more powerful and better specified tests in examining the link between board composition, accounting performance metrics, and shareholder value. Overall, I argue that incorporating these differences in decision-making power has important implications for studies in corporate governance.

Going for Broke: Restructuring Distressed Debt Portfolios

This article discusses how to restructure a portfolio of distressed debt and what the gains are from doing so, and attributes these gains to restructuring and portfolio effects. This is an interesting and novel problem in ?xed-income portfolio management that has received scant modeling attention. We show that debt restructuring is Pareto improving and lucrative for borrowers, lenders, and investors in distressed debt. First, the methodological contribution of the paper is a parsimonious model for the pricing and optimal restructuring of distressed debt, i.e., loans that are under-collateralized and are at risk of borrower default, where willingness to pay and ability to pay are at issue. Distressed-debt investing is a unique portfolio problem in that a) it requires optimization over all moments, not just mean and variance, and b) with debt restructuring, the investor can endogenously alter the return distribution of the candidate securities before subjecting them to portfolio construction. Second, economically, we show that post-restructuring return distributions of distressed debt portfolios are attractive to ?xed-income investors, with risk-adjusted certainty equivalent yield pickups in the hundreds of basis points, suggesting the need for more efficient markets for distressed debt, and shedding light on the current policy debate regarding the use of eminent domain in mitigating real estate foreclosures.