Research

Published Papers

        - Supplementary Appendix

        - Replication Package

     - Abstract: I develop two empirical models to quantify the agency frictions due to moral hazard in top management teams. They capture shareholders' distinct perspectives on compensating top managers: the Individual Model, in which managers in a firm unilaterally shirk, and the Team Model, in which managers choose effort jointly. The Team Model rationalizes observed compensation better than the Individual Model, underlining the importance of managerial coordination and team-based incentives. This paper also offers novel estimates of agency frictions in a team production setting. Risk premium explains a large portion of the pay differential across and within firms. Firm value would have dropped between 4% and 15% if managers shirked. Additional counterfactual estimation suggests that shareholders could reduce the total compensation by up to $17 million if they were to switch from the individual perspective to the team perspective.


      - Supplementary Appendix

     - Abstract: This paper investigates the effects of regulatory interventions on contracting relationships within firms by examining the impacts of the Sarbanes–Oxley (SOX) Act on CEO compensation. Using panel data of the S&P 1500 firms, it quantifies welfare gains from a principal–agent model with hidden information and hidden actions. It finds that SOX: (1) reduced the conflict of interest between shareholders and their CEOs, mainly by reducing shareholder loss from CEOs deviating from their goal of expected value maximization; (2) increased the cost of agency, or the risk premium CEOs are paid to align their interests with those of shareholders; (3) increased administrative costs in the primary sector (which includes utilities and energy) but the effect in the other two broadly defined sectors, services and consumer goods, was more nuanced; and (4) had no effect on the attitude of CEOs toward risk.


- Abstract: As the share of all income going to the top 1 percent has risen over the past four decades, so has the share of top incomes coming from labor income relative to capital income. The rise in labor income is mainly due to the explosion in executive compensation over the same period mostly because of the increase in executives being paid with stocks, options, and bonuses. The principal-agent model explains the reason for such compensation instead of a flat salary. Yet hundreds of papers in economics, finance, accounting, and management have reached no consensus on whether executive compensation is efficient or whether empirically it conforms to the prediction of the principal-agent theory. In this article, we argue that this lack of consensus is due to two issues: The first is a measurement issue, and the second is that the exact prediction of the principal-agent model depends on many objects unobservable to the econometrician. We illustrate how using theory-based estimation together with a model-motivated measure of total compensation can help overcome these issues. Finally, using a model-consistent measure of compensation and theory-based estimation, we conclude that executive compensation broadly conforms to the principal-agent theory; however, each situation and the variables used have to be carefully modeled, identified, and estimated.


     - Abstract: We use the occasion of a change in tax policy that raised the tax rate for many of the listed companies in China to examine tax-induced earnings management (TEM) from the perspective of political connections. We find that when the tax rate increased, only those affected firms with politically connected management engaged in TEM. This suggests that, in addition to motivation for managing earnings, capability of influencing tax authorities is also an important determinant of TEM. We also find that TEM helped the firms with politically connected management to reduce their tax burden. 


    - Abstract: Conflicts of interest between local governments and the central administration in China have yielded many local policies that only serve the interests of local governments. The policy of first levying and then rebating taxes is an example of how local governments eschew the national tax regulations to boost local economies rather than national interests. In 2001, the Chinese government announced the termination of local tax rebates, which had some expected outcomes. We find that local governments complied with the new tax policy even though it no longer allowed local governments to grant tax incentives. However, some companies found ways to avoid the greater tax burdens by moving their business registration locations to tax havens. We also find that firms controlled by local governments were less likely to change registration locations. Our study examines the national tax regulation in China and explores how tax rules influence company decisions. In addition, we show that non-tax incentives, such as local economic development, may also influence company decisions.


    - Abstract:  For the reason why internal cash flow can influence investment there exist two alternative explanations, i.e., Free-Cash-Flow Hypothesis associated with overinvestment and Asymmetric-Information Theory indicating underinvestment. It is important to distinguish the two explanations. This paper takes ownership factor into account and empirically examines investment-cash flow sensitivity based on the data of listed companies in China from 1998 to 2001. We find that, in the companies controlled by local governments or local state-owned enterprises (SOEs), the investment-cash flow sensitivity decreases as the largest shareholder’s holding increases; while in the companies controlled by central government, non-state-owned entities or natural persons, the sensitivity does not decline as the largest shareholder’s holding increases. Our results suggest that there exist free cash flow problems in the companies controlled by local governments or local SOEs.


Publications in Chinese

Books

Journal Papers

       - Redistributed by Xinhua Digest (No. 19, 2007)

 

Working Papers and Work-in-Progress