Mariassunta Giannetti, Stockholm School of Economics

The project output consists of four papers. The first one, by Mariassunta Giannetti and Guido Friebel, currently under second review at the Journal of the European Economic Association. The second one, single authored by Mariassunta Giannetti, which is currently being presented at University workshops and conferences and that will be submitted at top finance journals. The third one by Renée Adams and Daniel Ferreira, has been accepted at the Journal of Finance. The fourth one, by Renée Adams, is currently under first review at the Review of Finance. Below, I briefly describe the four papers and the steps taken to disseminate their results.

1) Fighting for Talent: Risk-Taking, Corporate Volatility, and Organizational Change, by Mariassunta Giannetti and Guido Friebel, under second review at the Journal of the European Economic Association
During the nineties, talented workers began to spurn secure jobs in large organizations, which were formerly considered prestigious. They developed more positive attitudes towards jobs in small, innovative startups, although these involved less job security. We build and test a model that identifies some of the economic forces behind the shift in the supply for talent from large to small firms. Small firms with little capital at take take excessive risk. They realize more of their workers' risky ideas, which allows to poach creative workers from better capitalized firms. This advantage increases if a) workers receive easier credit access, and b) technological progress raises the payoff from new ideas. As small firms take excessive risk, average enterprise profitability in the affected sectors decreases, while bankruptcy increases. Moreover, large firms react through inefficient organizational changes. The empirical evidence we present is consistent with the implications of the theory. We also carry out an array of checks which corroborate the empirical validity of our results.

Circulated as ECGI working paper #111/2005

Presented at:
Western Finance Association 2003
CEPR European Summer Symposium in Financial Markets (Gerzensee)
Harvard Business School Conference on Entrepreneurship and Innovation
CEPR Conference on Organizational Behaviour, Structure and Change (Toulouse)
RICAFE conference (Frankfurt)
IZA Conference on Interactions of Financial and Labor Markets (Bonn)
CES/IFO Summer Institute
European Economic Association and the Econometric Society Meetings in Venice
Stockholm School of Economics
Norwegian School of Economics and Business Administration (Bergen)
Stockholm University
University of Lugano
University of Zurich
Athens University of Economics and Business
Federal Reserve Bank of Saint Louis

2) Serial CEOs' Incentives and the Shape of Managerial, by Mariassunta Giannetti
This paper analyzes the optimal contracting consequences of a recent phenomenon in the managerial labor market, CEO job hopping. I show that when the managerial labor market is thin and growth opportunities are relatively low, the optimal contract rewards the CEO for past performance through a bonus. Nevertheless, the CEO takes a long horizon in selecting corporate strategies. If growth opportunities improve, but opportunities for job hopping remain limited, the optimal contract must include restricted-equity-like claims, but overall compensation does not increase. When the managerial labor market provides more opportunities for job hopping, large differences in the structure of executive contracts emerge. It is still optimal to offer a bonus contract, even though the manager selects inefficient short-term strategies, if growth opportunities are expected to be weak. If, instead, growth opportunities are perceived to be relatively strong, an increase in long-term equity compensation drives a surge in overall CEO compensation. I show that, under these conditions, the optimal contract may include non-restricted equity even though the main problem is managerial retention in the intermediate period. I argue that the mechanisms highlighted in the model can explain both the surge in U.S. CEO compensation and the large differences in the level and structure of managerial compensation across countries and across firms within a country.

Presented at:
Corporate Governance Conference at the Said School of Business in Oxford,
SIFR Conference on Corporate Governance in Stockholm
CEPR Corporate Finance and Governance Conference in Tokio
Graduate School of Finance, Helsinki School of Economics and Swedish School of Economics

3) A Theory of Friendly Boards by Renee Adams and Daniel Ferreira, forthcoming in the Journal of Finance
Both the Business Roundtable and the American Law Institute (see e.g. Monks and Minnow (1996), p. 172) list advising management among the top five functions of the board of directors in the United States. The advisory role of the board exists not only in the sole board system in the United States but also in, for example, Europe, where boards in several countries are formally separated into a management and a supervisory board. However, while the monitoring role of the board has been studied extensively in a large, mostly empirical, literature, the advisory role has received little attention. This paper examines one implication of combining the board's two roles in the sole board system, then turns to a discussion of the dual board system. We argue that a characteristic of the sole board system is that because the entire board is responsible for monitoring the manager, the manager may face a trade-off when the board also advises him.

To analyze this trade-off, we develop a model of strategic communication between the manager and the board. The first implication of our model is that emphasizing director independence may have adverse consequences in the sole board system. The reason is that managers are less inclined to share information with a sole board as its monitoring intensity increases. With less information, even an independent board cannot monitor effectively. This implies that recent regulation aimed at increasing board independence may decrease shareholder value, even though shareholders may benefit if increases in independence are accompanied by improved disclosure practices. In contrast, enhancing the independence of supervisory boards in a dual board system will not affect the incentives of managers to share information. Thus, increasing the independence of supervisory boards unambiguously increases shareholder value.

When boards have an advisory role, we show that shareholders may be better off if the board's preferences are aligned with those of managers. This suggests that nonshareholder constituency statutes may not be as detrimental to shareholder value as many argue, because they allow boards' preferences to be more aligned with those of managers. On the other hand, our model questions whether workers' interests should be directly represented on the supervisory board in the system of codetermination as in Germany.

Since information generated during the advisory process enhances the monitoring process, as long as managerial control benefits are not too large, our model implies that the first-best outcome for shareholders is implemented by the sole board system. Otherwise, it is better to give shareholders the choice of board structure. In this case, firms that might otherwise be forced to choose a management-friendly sole board may prefer to move to a dual board structure in which monitoring is higher. If one views the audit committee as a variant of the supervisory board, our analysis suggests further that shareholders may benefit from measures which strengthen the audit committee's role as an independent monitor.

Because monitoring is more effective when a sole board also advises, it is important to also consider the board's advisory role when evaluating board effectiveness and composition. Investigating circumstances in which it is optimal to have a board which does not monitor too much has implications for the interaction between monitoring by boards and monitoring by other governance mechanisms. When a management-friendly board is optimal, one should expect other governance mechanisms to pick up the slack.

Circulated as ECGI Working Paper No. 100/2005; forthcoming in the Journal of finance

Presented at the Following Conferences and Universities:
o SITE Conference on Corporate Governance in Transition Economies, Warsaw, 2004
o Symposium of the ECB-CFS Research Network on "Capital Markets and Financial Integration in Europe", 2004
o European Econometric Society Meetings, 2003
o NBER Research Conference on Corporate Governance, 2003

4) What do boards do? Evidence from board committee and director compensation data, by Renee Adams
Little is known about what boards do on a routine basis. Part of the difficulty in describing board behavior is the lack of access researchers have to boards. Thus Lorsch and MacIver's (1989) survey-based study of how boards operate remains one of the most influential depictions to date. Another problem is that board structure is complex: boards may differ in their size, composition, numbers and composition of committees, number of meetings of various committees, compensation of directors as well as in various other aspects. Thus it is difficult to compare boards of different firms along more than a few dimensions. In this study I use a novel measurement approach to circumvent both of these problems. I study the aggregate amounts 352 Fortune 500 companies paid their boards for committee service in 1998. I quantify the amount of committee compensation firms paid for what the literature often identifies as boards' three most important functions: oversight, dealing with strategic issues and considering the interests of stakeholders. The amount firms pay their boards for oversight duties is the highest, thus boards appear to take their traditional oversight role seriously. However, there is a fair amount of variation across firms in the amounts they pay and the incentives they provide for different committee functions. Cross-sectional variation in the amount of board compensation allocated to their different functions suggests that firms have different oversight and advising requirements.

Consistent with theories concerning firms' monitoring needs, I find that large firms and diversified pay their boards more for oversight duties. Large firms, growing firms and older firms also pay their boards more for dealing with stakeholder issues on both an absolute and a relative basis. After decomposing my measures of board compensation into measures of meeting intensity and incentives per meeting unit, I also find that the complexity of the work required of directors seems to vary across firms. In particular, older firms provide their directors with smaller incentives per meeting unit, consistent with the idea that board work in older firms may be more bureaucratic.

Although boards of directors have been at the center of public attention recently, little is actually known about what boards do on a routine basis. By examining the pay directors receive for providing inputs, in particular how much firms pay for task-specific duties, I believe this study can help further our understanding of directors' activities.

Presented at the Following Conference and Institute:
o European Finance Association Meetings, 2005
o Stockholm Institute for Financial Research, 2005