Urs Peyer

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.

Leverage and internal capital markets: evidence from leveraged recapitalizations

Abstract We study the internal allocation of resources for diversified firms that complete a leveraged recapitalization. Before the recapitalization, internal capital markets allocate investment to high q segments. After the recapitalization, segment investment becomes less sensitive to q and more sensitive to segment cash flow. We show that firm value is positively related to investments sensitivity to segment q and negatively related to investments sensitivity to segment cash flow. Our analysis highlights an indirect cost of debt that has received little attention: pressure to meet interest obligations creates an incentive to emphasize investments that generate high levels of current cash flow.

Are Buybacks Good for Long-Term Shareholder Value? Evidence from Buybacks around the World

This paper documents that short-term returns around share repurchase announcements and long-run abnormal returns afterwards are following the same pattern in non-US firms as document by prior literature for U.S. firms. We test whether cross-country differences in corporate governance quality and regulatory differences can explain variation in the short- and long-run abnormal returns. We find positive announcement returns around the world, higher in better governed countries and firms, and where regulation allows the board rather than the shareholders to approve a buyback announcement. Long-run abnormal returns are also observed globally and they are related to an undervaluation index (Peyer and Vermaelen, 2009, RFS) consistent with the interpretation that managers are able to time the market by buying back their own shares at low prices. Governance quality is also related to returns. Firms with lower governance ratings outperform those with higher ratings in the long run consistent with the buyback signalling lower agency problems than expected by the market. Furthermore, long run abnormal returns are higher in board approval countries suggesting that board approval regimes make managers act more in the interest of long-term shareholders rather than using buybacks to manipulate share prices.

Luck and Entrepreneurial Success

How much of entrepreneurial performance is sheer luck compared to talent, experience, education, and hard work? We define luck as unexpected performance and look for an answer in a large survey of entrepreneurs. Accordingly, luck ranks last in importance among various success factors and accounts for less than one third of performance variation. This ranking is unaffected by past performance and many personality traits, including self-attribution and illusion of control. Luck matters, however, in activities such as finding the appropriate business idea or choosing the right moment to enter a market. More important, luck perceptions shape decisions. For example, individuals who believe luck is important are reluctant to become entrepreneurs. Consistent with the definition, what entrepreneurs believe is luck correlates with the unexplained variation in a standard econometric model of performance. Estimates of that model also show that hard work does affect performance. So do talent, education, and, especially, experience.

Luck and Entrepreneurship

What is luck in the opinion of entrepreneurs, how does it affect decisions, and what role does it play in firm performance? For an answer we rely on a unique survey of 63,202 individuals. Luck perceptions shape decisions. Individuals who believe luck is important are reluctant to become entrepreneurs, and those who do exhibit lower commitment. Luck perceptions also play a crucial role in important entrepreneurial activities. Interestingly, however, luck perceptions rank last in importance among various determinants of overall entrepreneurial performance. One possible reason is that entrepreneurs do not generally pursue radically new ideas but replicate ideas seen elsewhere.

Political Affiliation and Dividend Tax Avoidance: Evidence from the 2013 Fiscal Cliff

This paper uses the 2013 fiscal cliff as a natural experiment to examine how the political affiliation of the CEO affects a firms response to an expected increase in personal taxes on dividends. Firms could avoid such additional taxes by paying extra dividends and accelerating dividends in the last 2months of 2012. These tax avoiders are compared with a sample of firms that did not accelerate the payment of their first quarterly dividend from the first 3months of 2013 to November or December 2012 (the deliberate taxpayers). Ceteris paribus, Republican CEOs are more likely to help their investors to save money on personal income taxes. However, the political affiliation has explanatory power in addition to previously documented effects (Hanlon and Hoopes, 2014), such as the consequences for the CEOs personal wealth as well as the percentage of insider holdings. Reputational concerns about “avoiding taxes for the rich” as well as corporate governance quality are also significant determinants of corporate behavior.

Do Firms Hedge Optimally? Evidence from an Exogenous Governance Change

We ask whether firms hedge optimally by analyzing the impact the NYSE/NASDAQ listing rule changes have had, which exogenously imposed board composition changes on a subset of firms, on financial risk management. Using new proxies for the extent of financial risk management in non-financial firms we find that treated firms reduce their financial hedging, in a difference-in-difference framework. The reduction is concentrated in firms with higher conflicts of interests, such as a high CEO equity ownership level, which exposes them to more idiosyncratic risk, and a higher occurrence of option backdating. We reject the hypothesis that newly majority-independent boards reduce financial hedging due to a lack of knowledge. First, we find no difference in financial hedging for firms where SOX mandated the addition of a financial expert relative to those that already had such expertise. Second, shareholder value increases more during the period of time of the listing rule deliberations for treated firms that hedge prior to the treatment. We conclude that some firms hedge too much reducing shareholder value potentially to the benefit of under-diversified CEOs. We also show that board independence serves to reinforce monitoring which allows boards to cut back on excessive financial hedging.