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Working
Papers
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Abstract
We examine the shareholder wealth effects of takeover defenses by
developing a model in which takeovers facilitate the implementation of
technological innovations. In the rational expectations equilibrium of
the model with explicit contracts, we show that takeover defenses are
deployed to insure employees' firm-specific skills and that defenses
dominate severance payments as an insurance mechanism because the
latter distort the incentives of employees to exert effort. However,
takeover defenses also result in managerial entrenchment. Managers of
firms with weak boards choose takeover defenses which maximize their
benefits of control, rather than shareholder wealth: golden parachutes
serve to align managerial and shareholder preferences.
JEL Classification: G34, J24, J41
Keywords: hostile acquisitions, takeover defenses, managerial
entrenchment, golden parachutes
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Abstract
We
present a model of cash constrained entrepreneurs who need an investor
to finance their project. Investors can either be uninformed, such as
individual bondholders, or informed, such as venture capitalists and
banks. There is an entrepreneurial moral hazard problem, which can be
partially overcome through monitoring only by informed investors.
However, monitoring is only effective if investors can commit ex ante
to liquidate the project after observing a poor signal. We show that a
capital structure that minimizes commitment and information costs
requires informed investors to hold senior convertible debt,
uninformed investors to hold junior debt and entrepreneurs to hold
common stock.
JEL Classification: G21, G24, G32, G33
Keywords: bank, venture capital, monitoring, liquidation, seniority,
convertible debt
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Working
Papers
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Corporate Governance and the Design of Stock Option Programs (Job
Market Paper) (with M. Weber)
Abstract
Investors and academics increasingly criticize that features of
employee stock option (ESO) programs like no indexing to market
movements reflect rent-extraction by managers rather than optimal
contracting (managerial power view). It is argued that design of
option programs illustrates the inability of corporate governance
mechanisms in monitoring executives. We use a unique European data set
to investigate design features of ESO programs and the relationship
between the design of ESO plans and corporate governance structures.
We find that our sample companies show a very large variation with
respect to the characteristics of their stock option plans (e.g. in
the use of relative performance targets that need to be met before
options become exercisable). We document that ownership structures are
related to the ESO design in a way that is consistent with the
managerial power hypothesis: when ownership concentration is low and
the exposition to the U.S. capital market little, firms more often
have poorly implemented ESO plans. Moreover, we show that firms with
weak creditor rights more often have badly designed option plans. Our
findings also suggest that ineffective board structures
(insider-dominated boards) are related to the ESO design in a way that
supports the arguments of a self-dealing view.
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Stock Options and Employee
Behavior (with M. Weber)
Abstract
Employee stock options (ESOs) are a widespread and economically highly
significant phenomenon, both at a company and at an employee level.
Despite its economic importance and due to data limitations, there
exists very little empirical research that examines the behavior of
employees in stock option programs. Our study attempts to fill this
gap by empirically analyzing the behavior of option holders in a
distinct ESO plan at a very large German corporation. By combining
individual-level option exercise data with detailed data from an
extensive questionnaire, we study how employees exercise their stock
options and how they dispose of company stock acquired in ESO
programs. Moreover, we investigate which rational and behavioral
factors explain differences in the observed exercise behavior. We find
that employees exercise their options very early and in a few large
transactions. A large majority of option recipients sell the shares
acquired on exercise. Furthermore, our results suggest that,
inconsistent with traditional ESO theories, exercise behavior is not
driven by factors like risk aversion or individuals' holdings of
company stock that are included in rational models of exercise. Our
findings suggest that individuals' exercise decisions depend on the
psychological factors miscalibration and mental accounting.
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How do Employees Value their Stock Options? (with M.
Weber)
Abstract
This paper
investigates the value employees place on their stock options and how this
valuation relates to option exercises. To perform this task, we are able to
use a data set combining employee-level option exercises with subjective
option values extracted by means of an internal survey at a German DAX
company. We can combine this data with a wide set of individual variables
like risk aversion, diversification or loss aversion. Inconsistent with
economic theory, we find that the individuals in our data set substantially
overvalue the options they received. We can show that option values are
unrelated with measures of risk aversion. Loss aversion, however, does a
better job in explaining the heterogeneity in option values: higher degrees
of loss aversion are associated with lower option values. We also document
that optimism and overconfidence measures are significantly related to
option values. We show that managers that are very optimistic about company
stock place higher values on their options. This finding is consistent with
the sentiment hypothesis presented in recent research by Oyer and Schaefer
(2005) and Bergman and Jenter (2004). Moreover, we find only weak support
for the hypothesis that higher option values are associated with later
exercise decisions.
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