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Abstract:
We analyze characteristics of firms that reprice their executive stock options (ESOs). We document that repricings are economically significant compensation events but there is little else unusual about compensation levels or changes in repricers. Cross-sectionally, repricers are rapidly growing firms that experience a deep, sudden shock to growth and profitability. Repricers are likely to be smaller, younger, more concentrated in technology, trade or service industry sectors, and have smaller boards of directors relative to firms that did not reprice ESOs despite similar return shocks. Repricers have abnormally high CEO turnover rates, and do not show low institutional ownership or more diffuse ownership of their equity. Over 40% of repricers do not include the CEO in the list of executives repriced. Collectively, our evidence provides little support for the view that repricing primarily reflects managerial entrenchment or ineffective governance in firms.

Executive compensation, repricing

Abstract:
In 1993 and 1994, Freeport McMoRan Copper and Gold issued two series of gold-denominated depositary shares to finance the expansion of its mining capacity in Indonesia. The pricing of these securities reflected their enhanced credit quality, which arose from the positive correlation between the value of the firm and the value of the securities. This feature of the securities effectively bundles a gold hedge with financing. A bundled hedge avoids wealth transfers to senior bondholders, since junior bondholders can effectively net their bond-related claims on the firm against their hedge-related liability to the firm. Such securities cannot be replicated by conventional hedging strategies, and they also mitigate the asset substitution problem.

Risk management, Credit Enhancement, Gold-Linked, Hybrid Securities

Abstract:
In 1993 and 1994, Freeport McMoRan Copper and Gold issued two series of gold-denominated depositary shares to finance the expansion of its mining capacity in Indonesia. The pricing of these securities reflected their enhanced credit quality, which arose from the positive correlation between the value of the firm and the value of the securities. This feature of the securities effectively bundles a gold hedge with financing. A bundled hedge avoids wealth transfers to senior bondholders, since junior bondholders can effectively net their bond-related claims on the firm against their hedge-related liability to the firm. Such securities cannot be replicated by conventional hedging strategies, and they also mitigate the asset substitution problem.

Risk management, Credit Enhancement, Gold-Linked, Hybrid Securities

Abstract:
In this study, we study the relationship between the level of board monitoring activity and firm value for a broad panel of firms over a six-year period from 1999 to 2005. We develop and examine several proxies for the level and intensity of board monitoring based on board activity and committee structure. Our first proxy is the number of annual board meetings and our second proxy relates to the number of director-days devoted to monitoring. We use pooled and fixed effect structural models to examine the relationship between firm value and board monitoring as captured by these proxies. Other proxies we use are based on the committee structure reflecting the increased political and regulatory focus on the role of these committees. Specifically, we use the shift to a fully independent Audit and Compensation Committee and the initiation of a Nominating Committee to proxy for an increase in monitoring activity. We show that prior performance, firm characteristics, and governance characteristics, appear to be a important determinants of board monitoring activity as captured by our proxies. We also show that the efforts of a board are driven by corporate events, such as an acquisition or restatements of financial statements. Our results indicate that the increased oversight and monitoring by the board has led to some increase in firm value.

Corporate Governance, Board Monitoring, Board Meetings, Board Committees, Firm Value

Abstract:
We examine shareholder proposals that are withdrawn by the sponsor during the period 1989 to 1995 to identify factors that affect the relative ability of shareholders and managers to negotiate. We determine factors that affect withdrawal probability and investigate the effect of relaxations in the regulatory environment brought about by the 1992 SEC Proxy reforms. We find that proposals sponsored by institutional shareholders and coordinated groups are more likely to be withdrawn indicating that larger entities have greater ability to negotiate. Likelihood of withdrawal also increases as the number of corporate governance proposals filed by a sponsor increases. Managers are more successful in negotiating a compromise that leads to a withdrawal prior to 1992, whereas proposal sponsors are more successful in achieving proposal adoptions without a compromise after 1992. We also find that withdrawn proposals are associated with a positive valuation effect before 1992 and a negative valuation effect after 1992. We conclude that negotiations between managers and shareholders are most effective when both parties can contribute to the negotiation process and that tilting the process in favor of one party has adverse effects.

Abstract:
We study the relationship between governance changes and firm characteristics and the impact of governance changes on future firm performance using a sample of firms that make large positive and large negative changes in thirteen governance measures. We find that the governance changes are driven by a movement towards mean industry governance levels and merger pressure, and are related to changes in the firm's observable characteristics. For each governance measure, we examine the future performance of the sample of firms with a large increase in the governance measure and the future performance of the sample of firms with a large decrease in the governance measure. We find that both positive and negative governance changes lead to statistically significant performance changes. However, we find that there is no significant difference in performance between the large positive governance change and the large negative governance change samples. We conclude that the observed changes in governance are consistent with the notion that firms are in equilibrium with respect to their governance structures. These findings are robust to: alternate definitions of firm performance, a large sample of firms over eleven years, and alternate definitions of large governance changes.

Abstract:
In 1993 and early 1994, Freeport McMoRan Copper and Gold (FCX), a mining company, issued two series of gold-denominated depositary shares to raise 430 million dollars for expansion of their mining capacity in Indonesia. We price the depositary shares using a term structure model for the forward rates implied by gold futures and we show that FCX successfully enhanced the credit quality of the issue. This credit enhancement is achieved because the effect of linking the payoff of the depositary shares to gold reduces default risk and is similar to conventional risk management. The building of financing and risk management, however, allows the firm to target hedging benefits only to the newly issued securities. The design of the security overcomes the asset substitution problem and credibly commits the firm to hedging. The depositary shares issued by FCX illustrate how firms can enhance credit quality through financial engineering without changing the existing priority ordering of their capital structure.

Risk management, Gold-linked, Hybrid Securities

Abstract:
We propose a methodology of Genetic Programming to approximate the relationship between the option price, its contract terms and the properties of the underlying stock price. An important advantage of the Genetic Programming approach is that we can incorporate currently known formulas, such as the Black-Scholes model, in the search for the best approximation to the true pricing formula. Using Monte Carlo simulations, we show that the Genetic Programming model approximates the true solution better than the Black-Scholes model when stock prices folow a jump-diffusion process. We also show that the Genetic Programming model outperforms various other models in many different settings. Other advantages of the Genetic Programming approach include its robustness to changing environment, its low demand for data, and its computational speed. Since genetic programs are flexible, self-learning and sefl-improving, they are an ideal tool for practitioners.

Abstract:
We characterize conditions under which a large institutional shareholder and the manager of a firm will establish relationship investing, wherein the manager actively cooperates with the institution in the monitoring process, to resolve agency problems. The setting of our model is that of a privately informed manager choosing between a project that has a faster resolution of uncertainty and a project that has a delayed resolution of uncertainty. The agency problem arises because the manager has incentives to focus on the firm's perceived market value, rather than its true long-term value, through his compensation contract and leads to investment distortions. We show that relationship investing solves the agency problem and reduces the free-riding problem associated with large shareholder monitoring. We also show that under some conditions it is optimal for shareholders to make the manager's compensation more distortionary by increasing the manger's incentives to focus on the firm's perceived market value, in order to induce him to cooperate in the monitoring process.

Abstract:
Trading strategies and contingent claims with path-dependent returns are difficult to model analytically. Monte Carlo simulation, the standard solution technique, is computationally expensive and provides a solution only for the specific parameter values used in the simulation. We present an alternate "quasi-analytic" procedure that combines the power of the simulation approach with the computational efficiency of an analytical solution. Our method uses simulation results to construct an analytic function that maps the input parameters to the returns distribution function. This analytic function can then be used to directly estimate the returns distribution for other parameter values without further simulation. We illustrate the approach by analyzing the performance of a path-dependent long term protective put strategy that requires rolling over a series of short term options. The returns to the strategy depend on the investor's choice of put strike and rollover policy. We use our method to examine a risk averse investor's optimal trading strategy, a problem that is exceedingly time-consuming using standard Monte Carlo simulation. For example, the simulation approach takes more than 45 minutes to solve for just one particular volatility scenario. Our method provides the answer in a matter of seconds.

Abstract:
Trading strategies and contingent claims with path-dependent returns are difficult to model analytically. Monte Carlo simulation, the standard solution technique, is computationally expensive and provides a solution only for the specific parameter values used in the simulation. We present an alternative "quasi-analytic" procedure that combines the power and flexibility of the simulation approach with the computational efficiency of an analytical solution. Our method uses simulation results to construct an analytic function that provides an approximate mapping from the input parameters to the returns distribution function. This analytic function can then be used to estimate the returns distribution for other parameter values directly without further simulation.We illustrate the approach by analyzing the performance of a path-dependent long-term protective put strategy that requires rolling over a series of short-term options. The returns to the strategy depend on the investor's choice of put strike and rollover policy. We use our method to examine a risk-averse investor's optimal trading strategy, a problem that is time-consuming using standard Monte Carlo simulation. In one example, the simulation approach takes more than forty-five minutes to solve for just one particular volatility scenario, while our method provides the answer in a matter of seconds.

Abstract:
This paper presents an empirical analysis of the economic performance of the U.S. property-casualty insurance industry, using estimations across 18 lines of insurance for the years 1984-1993. It adopts an industrial organization approach, focusing on loss ratios and combined ratios as measures of pricing performance. The line's seller concentration ratio and share of direct writers in the line are both found to be significant determinants of performance. The results are consistent with shortcomings in competition in some insurance lines.