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Abstract:
We model CEO and director compensation using firm characteristics, CEO characteristics, and governance variables. We find that director compensation is related to variables that proxy for the level of monitoring and effort required by directors. After controlling for monitoring proxies, we find a significant positive relation between CEO and director compensations. We hypothesize that this relation could be due to unobserved firm complexity (omitted variables), and/or to excessive compensation of directors and managers. We find that these excessive compensations are associated with firm underperformance. Thus, we conclude that excessive compensation may be associated with an environment of ineffective monitoring, which we term cronyism.

director compensation, CEO compensation, monitoring, firm performance

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:
The literature has suggested liquidity price pressure as an explanation for the negative abnormal returns surrounding the announcements of conversion-forcing calls of convertible bonds and preferred stock, and of mergers via common stock exchange. We confirm the negative abnormal returns around the conversion-forcing call announcement, and under some specifications we also document a subsequent price recovery. The liquidity hypothesis implies that the price recovery should be inversely related to the initial price decline, and that the abnormal returns during the announcement event and the post announcement event should be related to proxies measuring the stock's liquidity. Our estimates are not consistent with these implications. Finally, we also do not find support for alternative explanations offered in the literature. Hence, we conclude that the reason for the negative abnormal returns around the announcement of a conversion-forcing call is still a puzzle.

Convertible bonds, Conversion forcing call, Liquidity pressure, Asymmetric information

Abstract:
We examine the relation between pay performance sensitivity and future stock returns for a large sample of firms between 1992 and 2004. On average, high pay performance sensitivity is associated with low future returns. Part of this negative relation may be due to a reduction in firm risk induced by risk-averse managers responding to an increase in the sensitivity of their wealth to firm performance. Confirming this effect, both systematic and idiosyncratic firm risks decrease after increases in CEO pay sensitivity. However, even after correcting for lower future risk, increased pay performance sensitivity is associated with decreased stock returns. In particular, future stock returns are negatively associated with risky option compensation. This finding is consistent with previous studies that link high option compensation to agency problems. The results are robust to numerous specifications and controls.

pay performance sensitivity, firm performance, firm risk, agency problems

Abstract:
This paper examines the impact of the borrower-lender relationship on the explicit loan interest rate and collateral, as well as the correlation between loan interest rates and collateral. When one uses OLS, we find an insignificant effect of collateral on loan interest rates. However, existing theory suggests that collateral is endogenously chosen. Using a simultaneous equation approach with well-identified instruments, we find that collateral has a statistically significant positive impact of 200 to 400 basis points on loan interest rates. These results show strong evidence for jointness in the terms of lending. We find this positive association to be stronger for personal (or outside) collateral than collateral provided by the firm's assets (or inside collateral). Consistent with the moral hazard theories of collateral and the results of Berger and Udell (1990, 1995), we find a positive correlation between observable firm risk variables and posting collateral. Finally, we find the economic impact of borrower-lender relationship to be small.

Loan pricing; collateral; bank-customer relationship; implicit interest rates

Abstract:
Market microstructure is the study of how markets operate and how transaction dynamics can affect security price formation and behavior. The impact of microstructure on all areas of finance has been increasingly apparent. Empirical microstructure has opened the door for improved transaction cost measurement, volatility dynamics and even asymmetric information measures, among others. Thus, this field is an important building block towards understanding today’s financial markets. One of the pioneers in the field of market microstructure is David K Whitcomb, who retired from Rutgers University in 1999 after 25 years of service. David generously funded the David K Whitcomb Center for Research in Financial Services, located at Rutgers University. The Center organized a conference at Rutgers in his honor. This conference showcased papers and research conducted by the leading luminaries in the field of microstructure and drew a broad and illustrious audience of academicians, practitioners and former students, all who came to pay tribute to David K Whitcomb. Most of the papers in this volume were presented at that conference and the contributions to this volume are a lasting bookmark in microstructure. The coverage of topics on this volume is broad, ranging from the theoretical to empirical, and covering various issues from market architecture to liquidity and volatility.

Liquidity, Volatility, Limit Orders, Microstructure, Trading Structure

Abstract:
This paper develops a simple signaling model whereby high valuation firm uses levels of investment, debt and dividends to convey information to the market regarding its valuation. Conditions are determined under which investment, debt and dividends are employed in a separating Nash equilibrium. Unlike many other signaling models where the source of asymmetric information concerns only the mean of the firms' cash flow, our model allows for two sources of asymmetric information: the mean and the variance of the cash flow. This paper finds that the choice of signals depends on the relative importance of these two sources of informational asymmetry. For example, we show that high valued firms signal their values by decreasing their debt if the source of asymmetric information is mainly driven by the variance of the cash flows. This latter result differs from the debt signaling models found in the literature. The findings of this paper are consistent with extensive empirical evidence.

Capital Structure, Signaling Model