This paper develops a simple equilibrium model where compensation disclosure causes an escalation in CEO pay. Disclosed information about the pay conditions of peer CEOs reduces the uncertainty in outside options, thus giving CEOs more bargaining power in the negotiation process of their pay package. Specifically, the disclosure of executive compensation triggers a ratchet effect in the mean executive pay within the CEO's peer group, accompanied by a compression effect in the variability of compensations paid, which slumps in successive increments that taper off over time. Contrary to the conventional wisdom, increased disclosure can cause increased pay.

This paper illustrates why some firms hire compensation consultants while others do not, and the implications for CEO compensation. We consider a matching model of firms and CEOs, in which firms are governed by effective boards that act on behalf of shareholders, non-conflicting consultants provide the boards with an unbiased signal of the managerial compensation in the labor market, and CEOs receive a fixed level of compensation. The model helps to explain why firms that pay more to their CEO are more likely to hire consultants and why CEOs of consulting clients receive higher pay than CEOs of non-clients. The model suggests that participation constraints can go a long way in explaining executive compensation.

We show that the observation of CEO pay at similar firms, enables CEOs to strike better deals with their own firms. Information about pay conditions of peer CEOs reduces the uncertainty in outside options, thus giving CEOs more bargaining power in the negotiation process of their pay package. Specifically, the mandated disclosure of executive compensation triggers a ratchet effect in the mean executive pay within the CEO’s peer group, accompanied by a compression effect in the variability of compensations paid, which slumps, in successive increments that taper off over time. Increased disclosure creates more transparency in the market for CEO talent, however perversely enabling risk-averse executives to extract higher compensation from their firms.

The Real Options Approach (ROA) to the management and valuation of mining firms should impart a distinctive pattern to the time path of the Greeks displayed by such firms during the recent price super cycle. This paper simulates the delta, gamma, vega and rho of a gold mining firm holding a portfolio of heterogeneous mines over the recent gold price cycle, to find out the telltale signs that the ROA should leave on the trajectories exhibited by such variables during that period. We show that the ROA and the standard NPV approach to mine management and valuation predict markedly different trajectories for the Greeks.

To be useful to project managers, real option analysis (ROA) needs to capture the unique characteristics of individual projects and, at the same time, remain tractable and intuitive. That is a challenge since actual projects are often complex, featuring multiple sources of uncertainty as well as multiple investment and operating options. To meet the challenge, ROA has to take a clinical approach to project management and valuation, tailoring its framework to the specifics of each individual project to reflect its main sources of flexibility without becoming overly complex. This paper undertakes a ROA of an offshore oil development project of an integrated oil and gas company. The sequence and interconnections of available real options – exploration options, appraisal options, scaling options and abandonment options – as well as the calibration of the model's parameters, are developed in close collaboration with the Exploration and Production (E&P) division of the company, to assure realism and adherence to what management believes are the key sources of investment flexibility in a typical offshore project. The project assumes that there is joint uncertainty about reserve size and the price of oil. While the first source of uncertainty is resolved through exploration and appraisal activities the second is resolved through a diffusion model. The available real options add a substantial value to the project, with the option to abandon being the most valuable.

Complex securities generally do not diffuse smoothly but by fits and starts in response to sudden shifts in demand, occurring as investors learn about the intrinsic value of the securities from their noisy performance. We use CAT bonds, a capital market-based alternative to CAT risk reinsurance, to illustrate the diffusion of a complex security that competes against a legacy financial product offered by financial intermediaries. We find that the diffusion of the security is highly path-dependent with the capricious ups and downs of its actual performance plus the competitive response of CAT reinsurers jointly determining its ultimate success or failure.

This paper explains the variations in incidence of accounting fraud across economic settings by putting the behaviour and motivation of managers under the microscope. To safeguard their reputation in the managerial labour market, managers of firms that perform poorly are prone to fraudulently inflate earnings if they expect the economy to be strong, since that raises the likelihood of peers reporting high performance. A realised level of economic activity, on the other hand, counteracts this tendency on the part of managers to overstate earnings, by reducing the number of firms that actually perform poorly. We term these two effects the incentive effect and the need effect, respectively. The two effects yield a distinctive relationship between the incidence of accounting fraud and macroeconomic conditions. Specifically, the fraction of firms fraudulently over-reporting earnings is positively related to expected economic performance and negatively related to realised economic performance.The incentive and need effects on collective fraud are examined empirically by relating proxies of the aggregate incidence of accounting fraud to expected and realised GDP growth rates. The results unambiguously support the predicted influence of macroeconomic performance.

We have detected 410 microcytosis among biological tests of military people. These microcytosis are principally coumpounded by haemoglobin's abnormalities (minor thalassemia, sickle cell diseases, E haemoglobin cases and cases of C haemoglobin) and cases of iron deficiency, usually among women. (C) 2008 Elsevier Masson SAS. Tous droits reserves.

We examine the trade credit linkages among firms within a supply chain to reckon the effect of such linkages on the propagation of liquidity shocks from downstream to upstream firms. We choose a sample appropriate for this task, consisting of a large data set of Italian firms from the textile industry, a well known example of a comprehensive manufacturing cluster featuring a large number of small and specialized firms at each level of the supply chain. The results of the analysis indicate that the level of trade credit that firms provide to their suppliers is positively related to the level of trade credit granted to their clients: when the level of trade credit granted to clients divided by sales goes up by 1, the level of trade credit provided to suppliers divided by cost-of-goods-sold goes up by an amount that varies between 0.22 and 0.52. Since all firms along the chain are linked by trade credit relationships, an increase in the level of trade credit granted by wholesalers generates a liquidity cascade throughout the chain. We designate the overall increase in the level of trade credit among all firms in the chain as a result of a unitary impulse in the level of trade credit granted by wholesalers as the multiplier effect of trade credit for the industry chain. We estimate such multiplier to vary between 1.28 and 2.04. We also investigate the effect of final demand on the level of trade credit sourced by firms at various levels of the chain and, in particular, whether such effect is amplified for firms further up in the chain as a result of liquidity propagation via trade credit linkages. We uncover evidence of such amplification when the links of liquidity transmission along the chain are individually modeled and estimated. An unitary increase in wholesalers' sales is found to produce an effect on trade payables among firms at the top of the chain (i.e., Preparers and Spinners) that is more than twice as big as the corresponding effect among firms at the bottom of the chain (i.e., Wholesalers).

Power plants whose production will be sold in a market context must be evaluated, taking into account market variables such as fuel, emissions and electricity prices. These variables have a stochastic behaviour, and therefore the power plant's present value is also stochastic. Using a stochastic process to estimate the power plant's present value, the best plan for investment can be devised to extract the maximum project value. This is achieved by considering multiple investment stages together with the possibility of postponing or abandoning the project when market conditions are unfavourable. The focus of the paper is on establishing the market-based value of a power plant and on determining the best execution of investment when it is done in multiple, modular stages. A comprehensive methodology is developed to establish a process for the plant present value, and to derive the optimal execution policy for investment.

A novel methodological approach is proposed to estimate the effect of separation of ownership and control by dominant shareholders on firm value. The approach offers two major innovations. First, it frees the researcher from the necessity of having to make an ad hoc judgment call regarding which firms feature entrenched owners and which don't. Under this approach, the main shareholder becomes entrenched when the Shapley Value (SV) of his voting rights crosses an unknown threshold that is estimated jointly with the other model parameters. This approach allows one to perform a test on the joint hypotheses that the incentive to expropriate held by the dominant shareholder impacts negatively the market performance of the firm if the main shareholder is entrenched but produces no impact otherwise. Secondly, it generates a market-based estimate of the critical level of power at which the main shareholder becomes entrenched. The method is applied to a sample of European firms and a threshold equal to 0.34 is estimated. Most firms from the UK have a main shareholder with a SV below the estimated threshold; in contrast, about half of the continental firms in the sample feature main shareholders whose power index is above the estimated threshold. A negative relationship is found between the incentive to expropriate and corporate valuation above the threshold, that is both statistically and economically significant; below the threshold, we find no evidence of a relationship.

This paper presents an efficiency argument that contributes to understand why corporate governance structures with a dominant shareholder are so prevalent in so many countries around the world. In an environment where outsiders cannot accurately monitor the performance of transactions made between firms and stakeholders, the existence of a controlling shareholder who is an insider to the firm's management allows for efficient contracting with stakeholders. Firms controlled by outside shareholders cannot sustain relationships with stakeholders, because managers of such firms have an incentive to falsely claim that transactions with stakeholders have produced an outcome that is unfavorable to the firm, and misappropriate the cash flows associated with the true outcome. To avoid being expropriated, in response to the announcement of an unfavorable outcome, the controlling party will fire the manager and it will refuse to make good on costly obligations toward the stakeholder. However, because outsiders cannot observe the transaction's true outcome, punitive actions by outside shareholders will occur even when the manager truthfully reports an unfavorable outcome. Since these misguided disciplinary actions reduce the ex-ante value of transactions to stakeholders, stakeholders only accept doing business with firms controlled by outside investors if the frequency of misguided disciplinary actions is not too high. Thus, where outside shareholders cannot target accurately disciplinary actions to opportunistic managers, insider control is required for efficient contracting with stakeholders. This efficiency benefit of insider control should be taken into account if one wants to explain the prevalence of firms featuring dominant shareholders with a hands-on approach to their firms' management.

In the mid-nineties FIFA decided to increase from two to three the number of points assigned to the winning team of a soccer match played under traditional round-robin national leagues. Since a game of soccer can be regarded as a contest, FIFA's measure provides an interesting case-study for analysing how a change in the system of rewards (from a zero to a non-zero sum rule) may affect the contestants' equilibrium behaviour. In this paper we try to assess, both theoretically and empirically, whether FIFA's new point rule has changed soccer towards a more offensive game, in which teams adopt more risky strategies. In particular, we evaluate the “naïve hypothesis” according to which the measure would induce every team to play always more offensively, and we explore the extent to which the change in teams' behaviour may be affected by quality differentials between teams. Our most important hypothesis is that when the asymmetry between opposing teams is large enough, an increase in the reward for victory induces the weaker team to play more defensively, rather than the opposite. By looking at a subset of matches held in the Portuguese first division league, which approximate the conditions of our model, we find support for this hypothesis.

We put forward a novel methodological approach to estimate the effect of separation of ownership and control by dominant shareholders on firm value. The approach offers three major innovations. First, it uses the Shapley Value (SV) of the voting rights of the dominant shareholder rather than the proportion of votes under his control as a measure of his power of control within the firm. We argue that the SV is a more accurate metric and thus helps improving the quality of the estimation. Secondly, it frees the researcher from the necessity of having to make an ad hoc judgment call regarding which firms feature dominant shareholders with effective control and which don't. Under our approach, the main shareholder achieves effective control over management when the SV of his voting rights crosses an unknown threshold that is estimated from the data jointly with the other model parameters. Thirdly, it generates a market-based estimate of the critical level of power at which a shareholder gains control over management. We apply this method to a sample of European firms and estimate a threshold equal to 0,27. Above the threshold we document a negative effect of separation of ownership and control, that is both statistically and economically significant; below the threshold, we find no statistically significant effect.

We develop a model wherein the choice between adjustable- and fixed-rate debt can serve as a signal of firm quality. The nature of the signal depends on expected inflation volatility relative to other risk parameters. Evidence from a matched sample of debt announcements over the period 1978 to 1986 shows a difference of -2.05 percent between stock price reactions to adjustable rate and fixed rate announcements when expected inflation volatility is above an estimated threshold. Below this threshold, the difference is +0.98 percent. The evidence supports the hypothesis that the riskier debt choice serves as a favorable signal of firm quality.

This paper presents a reputation model of divestiture activity that yields a sharp cross-sectional implication for event studies of sell-off announcements: A decision to divest a division that is known to be successful conveys good news about the division; in contrast, a decision to divest a division that is known for underperformance conveys no news about the division. We test these hypotheses on a sample of sell-off announcements for which we find stories in the Wall Street Journal unambiguously characterizing the division being sold as either a “winner” or a “loser”. The stock price reaction to the sell-off of losers is indistinguishable from zero while the stock price reaction to the sell-off of winners is a statistically significant 2.5%. These results are strengthened when we expand the sample to include divisions whose profitability was announced in the company's annual report. For this expanded sample, the average stock price reaction to the announcements of sell-offs of losers remains indistinguishable from zero, while returns from the sell-offs of winners average a highly significant 3.4%.