The sensitivity of stock options' payoff to return volatility, or vega, provides risk-averse CEOs with an incentive to increase their firms' risk more by increasing systematic rather than idiosyncratic risk. This effect manifests because any increase in the firm's systematic risk can be hedged...

We develop a model of managerial compensation structure and asset risk choice. The model provides predictions about how inside debt features affect the relation between credit spreads and compensation components. First, inside debt reduces credit spreads only if it is unsecured. Second, inside...

Bank payouts divert cash to shareholders, while leaving behind riskier and less liquid assets to repay debt holders in the future. Bank payouts, therefore, constitute a type of risk-shifting that benefits equity holders at the expense of debt holders. In this paper, we provide insights on how...

This paper analyzes the optimal contracting consequences of a recent phenomenon in the managerial labour market, CEO job hopping. I show that if the managerial labour market is thin and firm growth opportunities are weak, the optimal contract rewards the CEO for past performance through a bonus....

We examine the relationship between the optimal incentive contract and the firm’s decision to fire a manager for poor performance. We first derive some theoretical results using a simple principal-agent model, and then examine the empirical evidence on the incidence of forced turnover among...

We present a model where firms compete for scarce managerial talent ("alpha") and managers are risk-averse. When managers cannot move across firms after being hired, employers learn about their talent, allocate them efficiently to projects and provide insurance to low-quality managers. When...

We present a model of labor market equilibrium in which managers are risk-averse, managerial talent (‘alpha’) is scarce, and firms seek alpha, that is, compete for this talent. When managers are not mobile across firms, firms provide efficient long-term compensation, which allows for...

Classic financial agency theory recommends compensation through stock options rather than shares to counteract excessive risk aversion in agents. In a setting where any kind of risk taking is suboptimal for shareholders, we show that excessive risk taking may occur for one of two reasons: risk...

Hartzell and Starks (HS) (2013) report that firms with more concentrated institutional investors pay executives less, and make this pay more sensitive to performance. In an extended data set covering 1992 to 2010, we find that institutional concentration has no such effects when we control for...

We study changes in chief executive officer (CEO) contracts when firms transition from public ownership with dispersed owners to private ownership with strong principals in the form of private equity sponsors. The most significant changes are that a significant portion of equity grants...