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Trading away Incentives
Stefano Colonnello, Giuliano Curatola, Shuo Xia
IWH Discussion Papers,
No. 23,
2022
Abstract
Equity pay has been the primary component of managerial compensation packages at US public firms since the early 1990s. Using a comprehensive sample of top executives from 1992-2020, we estimate to what extent they trade firm equity held in their portfolios to neutralize increments in ownership due to annual equity pay. Executives accommodate ownership increases linked to options awards. Conversely, increases in stock holdings linked to option exercises and restricted stock grants are largely neutralized through comparable sales of unrestricted shares. Variation in stock trading responses across executives hardly appears to respond to diversification motives. From a theoretical standpoint, these results challenge (i) the common, generally implicit assumption that managers cannot undo their incentive packages, (ii) the standard modeling practice of treating different equity pay items homogeneously, and (iii) the often taken for granted crucial role of diversification motives in managers’ portfolio choices.
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The (Heterogenous) Economic Effects of Private Equity Buyouts
Steven J. Davis, John Haltiwanger, Kyle Handley, Josh Lerner, Ben Lipsius, Javier Miranda
IWH Discussion Papers,
No. 10,
2022
Abstract
The effects of private equity buyouts on employment, productivity, and job reallocation vary tremendously with macroeconomic and credit conditions, across private equity groups, and by type of buyout. We reach this conclusion by examining the most extensive database of U.S. buyouts ever compiled, encompassing thousands of buyout targets from 1980 to 2013 and millions of control firms. Employment shrinks 13% over two years after buyouts of publicly listed firms – on average, and relative to control firms – but expands 13% after buyouts of privately held firms. Post-buyout productivity gains at target firms are large on average and much larger yet for deals executed amidst tight credit conditions. A post-buyout tightening of credit conditions or slowing of GDP growth curtails employment growth and intra-firm job reallocation at target firms. We also show that buyout effects differ across the private equity groups that sponsor buyouts, and these differences persist over time at the group level. Rapid upscaling in deal flow at the group level brings lower employment growth at target firms.
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Gemeinschaftsdiagnose: Pandemic Delays Upswing — Demography Slows Growth
Oliver Holtemöller, Stefan Kooths, Claus Michelsen, Torsten Schmidt, Timo Wollmershäuser
Wirtschaftsdienst,
May
2021
Abstract
In Germany, the first year of the coronavirus pandemic was characterised by extreme fluctuations in economic activity and a massively paralysed domestic economy. In their spring report, the leading economic research institutes assume that the current shutdown will continue and gradually be lifted from mid-May until the end of the third quarter. In the wake of the easing, private consumption in particular will recover strongly. Overall, GDP is expected to grow by 3.7 % this year and 3.9 % next year.
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Changing Business Dynamism and Productivity: Shocks versus Responsiveness
Ryan A. Decker, John Haltiwanger, Ron S. Jarmin, Javier Miranda
American Economic Review,
No. 12,
2020
Abstract
The pace of job reallocation has declined in the United States in recent decades. We draw insight from canonical models of business dynamics in which reallocation can decline due to (i) lower dispersion of idiosyncratic shocks faced by businesses, or (ii) weaker marginal responsiveness of businesses to shocks. We show that shock dispersion has actually risen, while the responsiveness of business-level employment to productivity has weakened. Moreover, declining responsiveness can account for a significant fraction of the decline in the pace of job reallocation, and we find suggestive evidence this has been a drag on aggregate productivity.
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Executive Compensation, Macroeconomic Conditions, and Cash Flow Cyclicality
Stefano Colonnello
Finance Research Letters,
November
2020
Abstract
I model the joint effects of debt, macroeconomic conditions, and cash flow cyclicality on risk-shifting behavior and managerial wealth-for-performance sensitivity. The model shows that risk-shifting incentives rise during recessions and that the shareholders can eliminate such adverse incentives by reducing the equity-based compensation in managerial contracts. Moreover, this reduction should be larger in highly procyclical firms. These novel, testable predictions provide insights into optimal shareholder responses to agency costs of debt throughout the business cycle.
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The Effects of Graduating from High School in a Recession: College Investments, Skill Formation, and Labor-Market Outcomes
Franziska Hampf, Marc Piopiunik, Simon Wiederhold
CESifo Working Paper,
No. 8252,
2020
Abstract
We investigate the short- and long-term effects of economic conditions at high-school graduation as a source of exogenous variation in the labor-market opportunities of potential college entrants. Exploiting business cycle fluctuations across birth cohorts for 28 developed countries, we find that bad economic conditions at high-school graduation increase college enrollment and graduation. They also affect outcomes in later life, increasing cognitive skills and improving labor-market success. Outcomes are affected only by the economic conditions at high-school graduation, but not by those during earlier or later years. Recessions at high-school graduation narrow the gender gaps in numeracy skills and labor-market success.
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Jobs and Matches: Quits, Replacement Hiring, and Vacancy Chains
Yusuf Mercan, Benjamin Schoefer
American Economic Review: Insights,
No. 1,
2020
Abstract
In the canonical DMP model of job openings, all job openings stem from new job creation. Jobs denote worker-firm matches, which are destroyed following worker quits. Yet, employers classify 56 percent of vacancies as quit-driven replacement hiring into old jobs, which evidently outlived their previous matches. Accordingly, aggregate and firm-level hiring tightly track quits. We augment the DMP model with longer-lived jobs arising from sunk job creation costs and replacement hiring. Quits trigger vacancies, which beget vacancies through replacement hiring. This vacancy chain can raise total job openings and net employment. The procyclicality of quits can thereby amplify business cycles.
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HIP, RIP, and the Robustness of Empirical Earnings Processes
Florian Hoffmann
Quantitative Economics,
No. 3,
2019
Abstract
The dispersion of individual returns to experience, often referred to as heterogeneity of income profiles (HIP), is a key parameter in empirical human capital models, in studies of life‐cycle income inequality, and in heterogeneous agent models of life‐cycle labor market dynamics. It is commonly estimated from age variation in the covariance structure of earnings. In this study, I show that this approach is invalid and tends to deliver estimates of HIP that are biased upward. The reason is that any age variation in covariance structures can be rationalized by age‐dependent heteroscedasticity in the distribution of earnings shocks. Once one models such age effects flexibly the remaining identifying variation for HIP is the shape of the tails of lag profiles. Credible estimation of HIP thus imposes strong demands on the data since one requires many earnings observations per individual and a low rate of sample attrition. To investigate empirically whether the bias in estimates of HIP from omitting age effects is quantitatively important, I thus rely on administrative data from Germany on quarterly earnings that follow workers from labor market entry until 27 years into their career. To strengthen external validity, I focus my analysis on an education group that displays a covariance structure with qualitatively similar properties like its North American counterpart. I find that a HIP model with age effects in transitory, persistent and permanent shocks fits the covariance structure almost perfectly and delivers small and insignificant estimates for the HIP component. In sharp contrast, once I estimate a standard HIP model without age‐effects the estimated slope heterogeneity increases by a factor of thirteen and becomes highly significant, with a dramatic deterioration of model fit. I reach the same conclusions from estimating the two models on a different covariance structure and from conducting a Monte Carlo analysis, suggesting that my quantitative results are not an artifact of one particular sample.
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Payroll Taxes, Firm Behavior, and Rent Sharing: Evidence from a Young Workers' Tax Cut in Sweden
Emmanuel Saez, Benjamin Schoefer, David Seim
American Economic Review,
No. 5,
2019
Abstract
This paper uses administrative data to analyze a large employer-borne payroll tax rate cut for young workers in Sweden. We find no effect on net-of-tax wages of young treated workers relative to slightly older untreated workers, and a 2–3 percentage point increase in youth employment. Firms employing many young workers receive a larger tax windfall and expand right after the reform: employment, capital, sales, and profits increase. These effects appear stronger in credit-constrained firms. Youth-intensive firms also increase the wages of all their workers collectively, young as well as old, consistent with rent sharing of the tax windfall.
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