[VFN] VGSF research seminar: Alexander Wagner and Jeffrey Zwiebel

Youchang Wu youchang.wu at univie.ac.at
Tue Jan 8 17:55:34 CET 2008

There will be two VGSF research seminars on January 11 at the Institute for Advanced Studies (HS II), Stumpergasse 56, 1060 Vienna:

Seminar 1 (14:00-15:30)
Speaker: Alexander Wagner (University of Zurich)
Topic: The Executive Turnover Risk Premium

Seminar 2 (16:00-17:30)
Speaker: Jeffrey Zwiebel (Stanford University)
Topic: Executive Pay, Hidden Compensation, and Managerial Entrenchment

Both papers can be downloaded from the VGSF homepage (Activities & Events--> Research Seminars). The abstracts are attached below.

Alexander and Jeff will visit VGSF on Friday (Jan 11) morning. If you would like to meet them at BWZ, please let me know as soon as possible.

Kind regards,

Youchang Wu

Abstract 1: Executive compensation has increased dramatically over the past 15 years, but so has forced CEO turnover. Previous research shows that fired CEOs do poorly later on in their careers and some forfeit their previous compensation. We argue that these adverse consequences of forced turnover explain part of the secular rise and cross-sectional variation of CEO pay. We fnd a large premium for exogenous turnover risk for the CEOs of the largest US corporations for the years 1993-2001: a one-percentage point increase in the probability of involuntary turnover is associated with about 10 percent more in terms of risk-neutral compensation. We show that this relation is unlikely to be driven by reverse causation or a general tendency towards stronger performance sensitivity of both pay and turnover.

Abstract 2: We consider a "managerial optimal" framework for top executive compensation, where top management sets their own compensation subject to limited entrenchment, instead of the conventional setting where such compensation is set by a board that maximizes firm value. Top management would like to pay themselves as much as possible, but are constrained by the need to ensure sucient effciency to avoid a replacement. Shareholders can remove a manager, but only at a cost, and will therefore only do so if the anticipated future value of the manager (given by anticipated future performance net of future compensation) falls short of that of a replacement by this replacement cost. In this setting, observable compensation (salary) and hidden compensation (perks, pet projects, pensions, etc.) serve different roles for management and have different costs, and both are used in equilibrium. We examine the relationship between observable and hidden compensation and other variables in a dynamic model, and derive a number of unique predictions regarding these two types of pay. We then test these implications and find results that generally support the predictions of our model.

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