Kevin J. Murphy

This paper examines how and when CEO debt-like compensation (i.e., “inside debt”) affects corporate investment levels. In contrast to the monotonic negative relationship predicted in prior research, we hypothesize and find that the relationship between inside debt and investment depends on whether firms require external debt to fund investments. In particular, we find a negative relation between inside debt and R&D investment for firms with low financial constraints, but this relationship is eliminated or reduced for firms facing high financial constraints. Moreover, we show that this result holds for firms that are constrained in their ability to raise debt, but not for firms that are constrained in their ability to issue equity. Our findings contribute to the literature on CEO compensation and provide a richer understanding of the role of debt-like incentives in reducing agency costs.

We examine how the level and structure of CEO pay is influenced by the characteristics and past experience of the members of the compensation committee, and also how these characteristics and experiences affect the probability of committee appointment. Our main findings indicate that (1) CEO pay in the current firm is more likely to be above (or below) market if CEO pay in the committee-members’ prior-firm experience was also above (or below) market; (2) the influence of this past experience diminishes over time as current year’s pay decisions are more likely to be influenced by experience from recent past years than from experience further past; and (3) while new directors are more likely to be appointed to the compensation committee if they have prior compensation-committee experience, we find no evidence that new directors with experience with highly paid CEOs are more likely to be appointed to compensation committees, and also no evidence that that companies choose compensation committees with experiences matching the focal firm’s pay philosophy. Overall, our paper extends the literature on board of directors affecting CEO pay, and also contributes to the literature on managerial styles and contagion.

It may seem surprising that a company in a declining industry could be managed successfully for shareholder value, but it has been done. During the three-year period starting January 1, 1991, and thus coming on the heels of the end of the Cold War and expected sharp cutbacks in U.S. defense spending, William Anders and his mostly new management team found ways to increase the wealth of the public shareholders of defense contractor General Dynamics (GD) by over 500%! In so doing, the company may well have provided at least a partial template for other companies in declining industries—think of today’s tobacco companies, and oil and gas majors like Exxon Mobil—now facing an unam- biguous “market mandate” to shrink.

We study relationships between parties who have different preferences about how to tailor decisions to changing circumstances. Our model suggests that relational contracts supported by formal contracts may achieve relational adaptation that improves on adaptation decisions achieved by formal or relational contracts alone. Our empirics consider revenue-sharing contracts between movie distributors and an exhibitor. The exhibitor has discretion about whether and when to show a movie, and the parties frequently renegotiate formal contracts after a movie has finished its run. We document that such ex post renegotiation is consistent with the distributor rewarding the exhibitor for adaptation decisions that improve their joint payoffs.

Models of early exercise of employee stock options invariably assume that exercise decisions are driven by risk-averse employees seeking to rebalance their undiversified portfolios. Using the entire history of stock option grants and a 10-year panel of over 10,500 option exercises from over 3,800 employees in five companies with a plausible proxy for outside wealth (home prices measured at the employee Zip Code level plus cumulative realized proceeds from prior equity grants), we find scant evidence that actual exercise decisions are driven by diversification concerns. Our main test shows that changes in home prices are generally positively associated with option exercises, a result that is consistent with liquidity motives for exercising, but inconsistent with diversification or leading behavioral theories. In additional analyses, we find that exercise is more likely following new grants of restricted stock but not new grants of options, risk-aversion parameters implied by observed exercises (assuming a diversification motive) are implausibly large, and employees often exercise all exercisable options (from the same or different grants) at the same time. Collectively, our findings suggest that diversification is unlikely to be a primary motive for early stock option exercise.