Corporate Finance, Contract Theory, Information Economics, Financial Markets
Firm Performance Pay as Insurance (Job Market Paper)
The prevalence of risky firm performance pay for non-executive employees presents a puzzling departure from conventional contract theory, which predicts insurance provision by the firm. I analyze a principal-agent model that accounts explicitly for the implicit incentives from internal promotions. A worker's likelihood of being promoted is low when many workers do well. At the same time, firm performance is high because it is an aggregation of individual performances. The optimal contract for a lower-level employee features firm performance pay because it provides a hedge against not being promoted. Thus, firm performance pay is not indicative of inefficient risk-sharing; rather, it is the insurance. The model’s predictions are consistent with observed phenomena such as option-like payoffs, performance-based vesting, and over-valuation of equity pay.
This paper studies the authorization and execution of buybacks in a Kyle micro-structure setting with two informed parties: a speculator who trades on his own account and a manager who implements buybacks for the firm. Buybacks introduce two opposing economic forces. Buybacks intensify the competition for trading profits, making it more difficult to profit from private information. However, buybacks also generate gains and losses that increase the dispersion of the firm's per-share value across different payoff states, making private information more valuable. Less informative buybacks weaken the first force, while magnifying the second. The manager has an incentive to manipulate the current stock price by knowingly repurchasing overvalued shares in order to increase her compensation; the associated agency problem constrains how much buybacks reflect her private information. The model generates novel predictions linking the structure of the manager's compensation, the buyback authorization decision, and trading outcomes following buybacks.
Works in Progress
Public and Private Weather Information in the Orange Juice Market (with Thomas Gilbert)
We exploit the commission / decommission of weather stations in Florida's orange producing counties as an exogenous change to the public information set to analyze the incremental information content of financial markets.
A Model of Cyber Insurance (with Ryan Skorupski)
We analyze a parsimonious model of cyber insurance in which an insurer insures firms against intrusions into their systems by a hacker. The hacker takes costly actions to develop an exploit and to search for vulnerable systems. A firm can take unobserved costly action to secure its own system. This framework features two opposing externalities. A firm securing its own system makes it more likely that unsecured firms will be discovered by the hacker, but also reduces the incentive of the hacker develop the exploit in the first place.