Exchange-traded Funds (ETFs), Executive and Non-executive Compensation, Governance, Labor, Financial Reporting and Real Effects
1. "Passive Demand but Active Pay: The Effect of ETF Flows on CEO Stock Option Compensation" (Job Market Paper)The rising prominence of exchange-traded funds (ETFs) over the past decade has resulted in a non-fundamentals driven demand for stocks held in ETF baskets. Prior research on ETFs finds both ETF-related stock price misvaluation and ETF-related increases in the co-movement of stock prices. Separately, prior research on CEO compensation suggests that firms should use less stock option compensation when stock prices are less informative about firm performance as it becomes more difficult to mitigate the moral hazard problem, but more stock option compensation when there is increased co-movement, as stock options become a more effective tool for retention. Motivated by the fact that stock prices play a key role in CEO compensation decisions, this study tests the effect of ETF flows on CEO stock option compensation. I find that stock option compensation is increasing with ETF flows. Further, I find that the positive relation between stock option compensation and ETF flows is prominent in cross-sections where there is an ex-ante motivation to compensate executives with options for retention purposes. Additionally, I do not find a positive relationship between risk-taking or firm performance with ETF flows, but do find a decrease in CEO turnover with increased ETF flows. The combined results suggest that: 1.) ETF flows may have affected firm incentives to compensate managers with stock options for retention purposes, and 2.) incentive alignment does not appear to be a prominent factor in awarding CEO stock options.
2. "The Impact of FAS 123R on Employee Retention" with Francesco Bova and Nan LiBuilding on evidence that firms grant employee stock options (ESOs) in order to retain employees, we assess the impact of FAS 123R, and the reduction in ESO use (in conjunction with substitution to other forms of pay) that followed its adoption, on employee retention at the Metropolitan Statistical Area (MSA)-level. We assess two primary measures of employee turnover at the MSA-level: the number of quarterly separated employees (overall separations) and the number of quarterly separated employees that find new employment within the same and adjacent quarter of separation (voluntary separations). We measure the ex ante incentive to compensate employees with ESOs using two state-level measures: the weakness of a state’s non-compete enforceability and the level of a state’s R&D expenditures. Using a difference-in-differences design, we find a relatively greater post-FAS 123R employee turnover in 1.) MSAs with lower non-compete enforceability levels, and 2.) MSAs from states with greater R&D expenditure and no IDD laws, where IDD laws potentially deter employees from working for a competing firm. Our results suggest that the adoption of FAS 123R had a negative impact on firms’ ability to retain employees in jurisdictions where employers had an ex ante incentive to compensate their employees with ESOs for retention purposes, despite substitution to other forms of pay.
Works In Progress
- "ETFs, Compensation Mix and Firm Performance"
- "Do ETF Flows Predict Aggregate Abnormal Earnings?"
- "Employee Quality and Cost of Debt" with Sasan Saiy
- "Does Employee Monitoring Reduce Agency Issues? Evidence From the Whistleblower Provisions of the Dodd-Frank Act"