Essays On CEO Compensation: New Evidence On The Managerial-Power Vs. Optimal Contracting Debate

This dissertation analyzes the effect of market analysts’ expectations of share prices (price targets) on executive compensation. It examines how well the estimated effects of price targets on compensation fit with two competing views on determining executive compensation: the arm’s length bargaining model, which assumes that a board seeks to maximize shareholders’ interests, and the managerial power model, which assumes that a board seeks to maximize managers’ compensation (Bebchuk et al. 2005). The first chapter documents the pattern of CEO pay from fiscal year 1996 to 2010. The second chapter analyzes the Institutional Broker Estimate System Detail History Price Target data file, which that reports analysts’ price targets for firms. I show that the number of price target announcements is positively associated with company share price’s volatility, that price targets are predictive of changes in the value of stocks, and that when analysts announce positive (negative) expectations of future stock price, share prices change in the same direction in the short run. The third chapter analyzes the effect of price targets on executive compensation. I find that analysts' price targets alter the composition of executive pay between cash-based compensation and stock-based compensation. When analysts forecast a rise (fall) in the share price for a firm, the compensation package tilts toward stock-based (cash-based) compensation. The substitution effect is stronger in companies that have weaker corporate governance. The fourth chapter explores the effect of the introduction of the Sarbanes-Oxley Act (SOX) in 2002 and its reinforcement in 2006 on the options granting process. I show that the introduction of SOX and its reinforcement eliminated the practice of backdating options but increased “spring-loading” of option grants around price targets announcements. Overall, the dissertation shows that price targets provide insights into the determinants of executive pay in favor of the managerial power model.

The Law and Economics of Hedge Fund Regulation: A Comparison between the U.S. and the EU

This doctoral dissertation seeks to assess and address the potential contribution of the hedge fund industry to financial instability. In so doing, the dissertation investigates three main questions. What are the contributions of hedge funds to financial instability? What is the optimal regulatory strategy to address the potential contribution of hedge funds to financial instability? And do new regulations in the U.S. and the EU address the contribution of hedge funds to financial instability? With respect to financial stability concerns, it is argued that despite their benefits, hedge funds can contribute to financial instability. Hedge funds’ size and leverage, their interconnectedness with Large Complex Financial Institutions (LCFIs), and the likelihood of herding behavior in the industry can potentially undermine financial stability. Nonetheless, the data on hedge funds’ size and leverage suggest that these features are far from being systemically important. In contrast, the empirical evidence on the interconnectedness of hedge funds with LCFIs and their herding behavior is mixed. Based on these findings, the thesis focuses on one particular aspect of hedge fund regulation: direct vs. indirect regulation. In this respect, a major contribution of the thesis to the literature consists in the explicit discussion of the relationships between hedge funds and other market participants. Specifically, the thesis locates the domain of the indirect regulation in the inter-linkages between hedge funds and prime brokers. Accordingly, the thesis argues that the indirect regulation is likely to address the contribution of hedge funds to systemic risk without compromising their benefits to financial markets. The thesis further conducts a comparative study of the regulatory responses to the potential contribution of hedge funds to financial instability through studying the EU Directive on Alternative Investment Fund Managers (AIFMD) and the hedge fund-related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.