INDEX
A
ABCP. See Asset-backed commercial paper
ABS. See Asset-backed securities
Accounting Principles Board (APB), 264
Accounting scandals, 288
accounting for options, 295–297
accounting rules, 298
CEO pay, 299–300
conflicted consultants, 298–300
Enron, 294
equity-based compensation, 297
full-service consulting firms, 300
median grant-date compensation, 295–296
option backdating, 290–294
performance shares, 298
restricted stock rising, 295–296, 298
Sarbanes-Oxley Act, 288
clawback provision of, 288–289
prohibiting personal loans, 288
stock options, disclosing new grants of, 289
SEC’s disclosure requirements, 299–300
Section 409(A), 294–295
stock options popularity, 296
Acquisitions, 579–580
double moral model, 590
exit type, 599
sampling procedures, 578
ADR. See American Depositary Receipt
Agency costs, 326
Agency problems, 322
Agency Cost of Debt, 323–324
Agency Cost of Equity, 323
Agency Cost of Free Cash Flow, 323
boards of directors, 322–324
capital markets, 325–326
overpaying newly hired CEOs, 332
political, legal, and regulatory system, 327–329
product markets, 328–329
types, 659
AIG. See American International Group
AIG Bonus Payment Bill, 306
Alt-A mortgage, 49–50
Alternative financing channels, 750, 760
alternative finance role, 761, 778
decomposition, 779, 782–784
financial sector comparison, 762, 789
alternative finance, future research on, 794–795
forms of financing, comparison, 792–793
legal and alternative institution development, 793–794
firm financing channels
across sectors in China, 780–781
by firm age, 779–780
firms with access to bank credit, 778–779
in India, 787
using Prowess database, 790
using World Bank surveys, 791
legal system, 762
markets and banks, 762–763
SOE and PSU, 779–780
trade credit, 761–762
types, 780–782
family and friends and seed capital forms, 785–788
private credit agencies, 785
trade credit, 782–785
works in corporate sectors, 763
Alternative funding sources, 586
concerning empirical research, 588
entrepreneurs, 586
external funding, 588
financing, 586
monitoring capabilities, 586–587
regression discontinuity approach, 587
trade-offs, 588
VC and angel financing, 587
VC-backed companies, 587–588
Alternative minimum tax system (AMT system), 158, 258–259
American Depositary Receipt (ADR), 713
American International Group (AIG), 305
American Reinvestment and Recovery Act (ARRA), 302
AIG, 305
bills, 305–306
proposing amendments to EESA, 303
Pay Czar, 306–307
pay restrictions, comparison of, 303–304
proposal for executive-pay restrictions, 302
public interest standard, 307
Say-on-Pay resolutions, 303–305
SEC disclosure rules, 306
TARP recipients bonus distribution, 306–307
AMLF. See Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility
Amoral familism, 665–666
AMT system. See Alternative minimum tax system
Anchoring, 364–365
Anglo-American capitalism, 669
APB. See Accounting Principles Board
Arbitrary security theorem, 86–87
ARRA. See American Reinvestment and Recovery Act
Asian Venture Capital Journal (AVCJ), 580
Asset-backed commercial paper (ABCP), 2, 12, 53
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), 58
Asset-backed securities (ABS), 2, 5–7
asset categories, 14–15, 20
credit rating changes, 20–21
default rate performance
cumulative impairment rates, 16–20, 22
5-year default rates, 20, 23
standard and poor’s default rate, 15–16, 21
European securitization, 19
issuance, USD millions, 14–15, 18
outstanding amounts, 14–15, 17
during financial crisis
difference in spreads, 22–24
spread level, 23–25
mortgage-related securities issuance, 13–14, 16
non-mortgage ABS outstanding amounts, 13–15
spreads, difference in, 21, 24
US outstanding, 13–14
Asset-based lendings, 720
Asymmetric information, 111
optimal dynamic contracts, 117
with adverse selection, 119
cash flows, 118
credit line, 119
distribution, 120
future asymmetric information, 117
impulse response concept, 118
optimal credit limit, 120
public information, 117
static contracts, 111–112
with adverse selection, 112
dynamic asset market, 114
equilibrium, 116–117
high-quality firms, 112
HJB equation, 115–116
infinite-horizon model, 112–113
investment opportunities, 113
non-decreasing process, 115
parameter restrictions, 113
recursive equations, 113
striking observation, 116
AVCJ. See Asian Venture Capital Journal
Average Treatment Effect (ATE), 505–506
Average Treatment Effect of the Treated (ATT), 505–506
Average Treatment Effect of the Untreated (ATU), 505–506
B
Bailout Bonus Tax Bracket Act, 305
Bank finance, 686–688, 760
Bank for International Settlements (BIS), 33
Bank-based and market-based systems
advantages, 736
corporate governance, 737
correlation, 736
financial structure, 739
using firm-level data, 738
in-depth analysis, 738
inter-temporal risk sharing services, 738
powerful banks, 736–737
prevalence of, 735–736
Bank-owned venture capital firms (BVC firms), 608–609
Banking sector, 764
bonds composition, 768
gap, 765–768
stock market concentration, 766–767
Bankruptcy Abuse Prevention and Consumer Protection Act, 38
Bankruptcy laws, 435
Bankruptcy Reform Act, 38
Basel III rules, 60–62
BEEPS. See Business Environment and Enterprise Performance Surveys
Behavioral corporate finance, 358
complications, 360–361
managerial biases approach, 359, 391–405
market timing and catering approach, 359, 361–391
open questions, 411–413
research in, 358–359
Behavioral signaling approach
applications, 410–411
budget constraint, 408
dividend-signaling model, 406
dividends
level, 410
Lintner model, 409–410
policy, 408–409
equilibrium, 408
information, 408
investor utility, 407
loss aversion, 406
manager utility, 407
motivations, 408
multi-period model, 406–407
quasi-rational investors, 405
reference dependence, 406
signaling models, 360
Bellman equation, 99
Big bath phenomenon, 243
Big Push industrialization, 670
BIS. See Bank for International Settlements
Bond markets, domestic, 768–770
Bonding hypothesis, 440
Bonus plans, (dis)incentives from, 241
non-linear pay-performance relations, problems with, 242–244
performance benchmarks, problems with, 244–245
performance measures, problems with, 245–246
short-term and long-term, 242
typical bonus plan, 241–242
Bootstrapping. See Filtered Historical Simulation (FHS)
Brownian motion, 87
Bureau of Internal Revenue, 253
Business Environment and Enterprise Performance Surveys (BEEPS), 720
BVC firms. See Bank-owned venture capital firms
C
Calendar-time portfolios, 371
Capital Asset Pricing Model (CAPM), 231, 399
Capital markets, (dis)incentives from, 246
abnormal stock returns, 246–247
earnings forecast error, 246
in-the-money options, 248
non-linear pay-performance relation, 247–248
temptations, 248
Capital markets, 71, 325–326
Capital structure, 71–72, 126–163
corporate diversification, 72
higher capital requirements, 72
Modigliani–Miller conditions, 72
technology firms, 72
CAPM. See Capital Asset Pricing Model
Cash flow (CF), 1533
Cash holdings, 721–722
Catch up economic development, 670
Catering approach, 359
CC. See Credit-card
CD. See Certificate of deposit
CDO. See Collateralized debt obligation
Center for Monitoring the Indian Economy (CMIE), 788
CEO. See Chief executive officer
CEO and shareholder wealth relationship, 233–234
average market capitalization of firms, 236
effective CEO ownership measurement, 235–236
Hall-Liebman measure evolution, 236
median equity at stake for CEOs, 237
Pay-Performance Sensitivity, 235–236
percentage ownership computation, 234–235
wealth-performance elasticity, 236–237
CEO pay, 248–249
See also Executive compensation
class warfare, 249
depression-era outrage
and disclosure requirements, 251–252
public disclosure, 253
SEC’s disclosure rules, 252
efficient-contracting camp, 214–215
emerging market for corporate control
golden parachutes, 267–272
new disclosure rules, 273–274
Section 280(G, 267–272
shareholder awakening, 272–273
knee-jerk reactions, 249
limitations, 215
managerial-power camp, 214–215
Nixon wage-and-price controls, 259–267
non-qualified stock options, 257–259
patterns for government intervention, 213–214
qualified stock options, 257–259, 263
resurrection, 265–266
restricted stock options, 253–259
takeover market, 268
CEO wealth and stock-price volatilities relationship, 237–238
Agency Cost of Debt, 238
calculations for pay-performance sensitivities, 238–239
excessive risk taking, 240–241
Fahlenbrach and Stulz’s analysis, 239
option-based incentives, 239– 240
risk-taking incentives, 238
stock-market movements, effect of, 240
Total Option Vega, 239 –240
troublesome fact, 240
Vega Elasticity, 239 –240
CEO-to-Worker Pay Ratio, 312
Certificate of deposit (CD), 531
CF. See Cash flow
CFO. See Chief financial officer
Charter value, 26
CHASEseries, 7
Chief executive officer (CEO), 212–213
Chief financial officer (CFO), 301
Civil law, 427, 430–431
Class warfare, 249
Clawback provisions, 309, 312
Clinton $1 million Deductibility Cap, 276–277
compensation expense deduction, 278–279
IRS Section 162(m), 278–279
performance-based compensation, 277–278
CLO. See Collateralized loan obligation
CMBS. See Commercial-mortgage-backed securitization
CMIE. See Center for Monitoring the Indian Economy
Collateralized debt obligation (CDO), 12, 384
Collateralized loan obligation (CLO), 12
Commercial paper (CP), 31
Commercial Paper Funding Facility (CPFF), 58
Commercial-mortgage-backed securitization (CMBS), 2–3, 45
Common-law legal tradition, 430
Compensation Committee Independence, 310, 312
Compensation Fairness Act, 306
Compensation policy, 189–193
See also Taxes and payout policy
empirical evidence, 191–193
ISOs and NQOs, 190
MM-perfect capital markets analysis, 189–190
nondebt tax shields, 190–191
prediction, 190
restricted stock, 191
salary payments, 190
Compustat firms
debt ratio for, 151
net debt ratio for, 152
Continuous-time formulation, 97
Continuous-time principal-agent models, 90–91
Control rights theories
contingent control structure, 591
continuous time moral hazard model, 591
CPE, 589–590
double moral hazard model, 590
ex-post bargaining game, 592
non-contractible value-adding advice, 590
using non-standard definition, 592
optimal contract, 591
terminating vs. refinancing venture, 590–591
variety of modeling assumptions, 592
VC contracts, 589–590
Control-enhancing mechanisms, 662–663
Controversy over perquisites, 261–262
agency problem, 263
escalation, 262
value of perquisites, 263
void in compensation, 262
Convertible preferred equity (CPE), 589–590
Corporate bond markets, 765
Corporate decisions
See also Market timing and catering approach
C-corporations vs. S-corporations, 175–176
capital markets, 193–194
debt capacity, 194
distressed reorganizations, 175
divestitures and asset sales, 176
dividends, 386
disadvantage, 387
disappearance, 387
dividend premium, 386–387
limitations, 387–388
earnings management, 388–389
empirical evidence, 195–196
financial reporting benefits, 178
firms trade off tax and nontax considerations, 178
LBOs, 176–177
pre-filing NOLs, 177
S- or C-corps, 177–178
tax-favored R&D activity, 179
TRA86 rules, 179
TRA86, 177
empirical predictions, 194–195
executive compensation, 390–391
firm names, 389–390
hedging with derivatives transfers income, 195
leveraged buyouts, 175
nominal share prices, 390
RDLP, 176
shifting funds, 194
theory, 194
Corporate finance, 158, 189–190, 686–692
Corporate governance, 435, 443
Corporate investment, 759–760
Corporate laws, 426
Corporate raiders, 267–268
Corporate taxation, 145–147
Corporate venture capital (CVC), 604–605
complementary role, 608
CVC-backed companies, 606
investments, 606
management scholars, 608
product market competition, 605
program, 605
sampling approach, 606–607
strategic and financial returns, 607
using ThomsonOne database, 607
US corporations, 606
Counterfactual outcome, 506
CP. See Commercial paper
CPE. See Convertible preferred equity
CPFF. See Commercial Paper Funding Facility
Credit line, 96–97
Credit-card (CC), 51
Creditor protection consequences, 442–443
Cross-border mergers, 690
Cross-Sectional Interactions, 372
Cross-sectional regressions, 135–136
CVC. See Corporate venture capital
D
DAG methodology. See Directed Acyclic Graph methodology
DD estimators. See Difference-in-Differences estimators
Debt issues
credit risk models, 382
long-term debt, 381
short-term debt, 381
Debt maturity structure, 161–163
Deficit credit firm, 165
Deficit Reduction Act, 270
Delaware Business Trust Act, 36–37
Delaware’s laws, 37
DeMarzo model, 41
Depression-era outrage
and disclosure requirements, 251–252
public disclosure, 253
SEC’s disclosure rules, 252
Difference-in-Differences estimators (DD estimators), 520
conditional expectations, 524–525
firm-year panel dataset, 523
internal validity checking, 529–531
balanced treatment and control groups, 530
control by systematic variation, 530–531
falsification tests, 529–530
multiple treatment and control groups, 530
timing of behavior change, 530
treatment reversal, 531
triple difference, 530
key assumption
average outcome, 529
features, 527–528
parallel trends assumption, 526, 528
pre-treatment periods, 526–527
post-treatment periods, 526–527
model extensions, 526
regression model, 523–524
single cross-sectional differences
cross-sectional regression, 520
OLS estimation, 521
post-treatment periods, 520
profitability control, 521
single difference estimators, 525
single time-series difference, 521–522
conditional expectations, 522–523
cross-sectional estimator, 523
treatment effect, 522
with two periods, 524
Directed Acyclic Graph methodology (DAG methodology), 718
Dividend clienteles, 184
low-dividend payout, 185
mutual funds and money managers, 185
static and dynamic, 185
stockholdings and trades, 184–185
Dividends, 180
dividend-signaling model, 406
policy, 369–370, 409
premium, 386–387
Dividends received deduction (DRD), 135
Dodd amendments, 303–305
Dodd-Frank Act. See Dodd–Frank Executive Compensation Reform Act
Dodd–Frank Executive Compensation Reform Act, 62, 307–308
pay and governance reforms, 308–309
additional disclosures, 309–310
CEO-to-worker pay, ratio of, 312
clawbacks, 309, 312
compensation committee independence, 310, 312
proxy access, 310, 312
say-on-pay regulation, 309, 311
pay restrictions for financial institutions, 308
Double-triggered payment, 268
DRD. See Dividends received deduction
Dynamic agency model, 104
Dynamic moral hazard, 102
adjustable-rate mortgages, 103
agent’s continuation value, 105–106
BMRV model function, 110
boundary conditions, 107–108
cash flow, 105
continuous stream of payments, 111
dynamic agency model, 104–105
using equations, 106
incentive-compatible contract, 103
investment function, 109–110
maximal risk prevention, 109
optimal contract form, 107
optimal mortgage design, 102–103
performance-related information, 108
Poisson switching process, 103–104
principal’s value function, 103–104
scale-invariance properties, 109
Dynamic security design
asymmetric information, 111
optimal dynamic contracts with, 117
static contracts in dynamic settings, 111–112
optimal, 90–91
dynamic moral hazard, 102
securities in dynamic models, 87
static models, informational problems in, 74
adverse selection, 82
moral hazard, 75
E
Earnings before interest, taxes, and depreciation (EBITDA), 141
Earnings before interest and tax (EBIT), 136, 564
EBIT. See Earnings before interest and tax
EBITDA. See Earnings before interest, taxes, and depreciation
EESA. See Emergency Economic Stabilization Act
Efficient contracting camp, 321–333
broad-based stock options, 338
CEO pay, trends in, 334
equilibrium model, 334
growth in use of stock options, 334–335
optimal-contracting theory, 335–337
traditional contracting theory, 335–336
Efficient-contracting camp, 214–215
Emergency Economic Stabilization Act (EESA), 300–301
ARRA amends, 302–307
bills proposing amendments to, 303
pay restrictions, comparison of, 303–304
golden parachutes, 301–302
pay restrictions, 301
Emerging market for corporate control
golden parachutes, 267–272
new disclosure rules, 273–274
Section 280(G), 267–272
shareholder awakening, 272–273
Empirical corporate finance
ATE recover, 510–511
average effects, 505–506
average leverage ratio comparison, 508
behavior comparison, 504–505
counterfactual outcome, 506
endogeneity problem, 511
heterogeneous effects, 510
outcomes, 505
private information, 509
random assignment, 507
randomization, 507
regression and endogeneity, link to
observable outcome, 509
OLS estimation, 509–510
treatment assignment, 508
treatment effect, 504–505
Empirical evidence on personal taxes
corporate debt ratios, 151
corporate income taxes and debt usage, 152–153
debt net tax advantage, 150
debt ratio for Compustat firms, 151–152
using firm-specific data, 152
firm’s debt and equity, 153
Miller equilibrium, 150
payout and capital gains income, 150–151
personal taxes affect security returns
affecting corporate financing decisions, 153
assets, 154
capital structure issues, 155
using CAPM-with-taxes specification, 156
implicit personal tax costs, 156
market frictions, 153–154
MIPS interest, 155–156
municipals and taxable government bonds, 154–155
tax capitalization, 156–158
End Government Reimbursement of Excessive Executive Disbursements Act (End GREED Act), 306
Endogeneity, 494–495
econometric techniques, 495
outcomes and treatment effects, 504–511
recognition, 495
regression framework, 497–504
sources, 495
Enron, 294
Enterprise Surveys (ES), 720
Entrepreneurship, 643
business family dominance, 671
American business groups, 673
British business groups,, 672–673
Chandler and Schumpeter perspective, 675
German business groups, 673–674
Japanese business groups, 674
economic development
Argentine firms, 664
dysfunctional institutions, 666–667
ill-developed institutions, 665–666
institutional development, 665
social development, 667
valuation discount, 666
family firm
benefits, 650
dynastic capitalism, 650
dynastic control, 653
family-controlled business groups, 655–656
full set diversification, 654
incumbents’ control, 653–654
network externalities, 654
New Endogenous Growth Theory, 650
political rent-seeking skills, 652
talents, 651
oligarchs, 668–669
advantages, 671
agency problem magnification, 668
Anglo-American capitalism, 669
Big Push industrialization, 670
catch up economic development, 670
empirical importance, 671
pyramiding, 667–668
robber baron capitalism, 669
rule, 670–671
succession decision, 656
advantages, 664
agency problem avoidance, 659
control-enhancing mechanisms, 662–663
cost, 657
family firms advantage, 663
founder’s decision, 657
four-factor model, 661
idiot son problem, 657
large shareholders role, 659–660
mainstream finance theory, 662
potent priority, 660
private benefits of control, 663
Schumpeter’s psychic reward, 658
superior voting shares, 658
voting power, 658
Equilibrium firm, 82–83
Equity-based compensation, 267
Equity-based pay, shareholder pressure for, 276
ES. See Enterprise Surveys
European Private Equity and Venture Capital Association (EVCA), 580
EVCA. See European Private Equity and Venture Capital Association
Ex ante misvaluation, 370
Ex post misvaluation, 370
Ex-day premia, 186
dividend imputation tax system, 188
ex-day premium, 186
franking credit, 188
imputation tax credit, 188–189
low-tax-rate investors, 187
market-makers, 186–187
payout and clientele results, 189
price discreteness and bid-ask bounce hypotheses, 187
Swedish lottery bonds, 187–188
tax-free investors, 186
Executive compensation, 345–346
See also CEO pay
agency problems, 322
Agency Cost of Debt, 323–324
Agency Cost of Equity, 323
Agency Cost of Free Cash Flow, 323
boards of directors, 322–324
capital markets, 325–326
political, legal, and regulatory system, 327–329
product markets, 328–329
bonus plans, (dis)incentives from, 241
problems with non-linear pay-performance relations, 242–244
problems with performance benchmarks, 244–245
problems with performance measures, 245–246
short-term and long-term, 242
typical bonus plan, 241–242
capital markets, (dis)incentives from, 246
abnormal stock returns, 246–247
earnings forecast error, 246
in-the-money options, 248
non-linear pay-performance relation, 247–248
temptations, 248
CEO bonuses, 250
changes to, 212–213
competing hypotheses, 329
depression-generated disgust, 250
efficient contracting camp, 321–322, 333
broad-based stock options, 338
CEO pay, trends in, 334
equilibrium model, 334
optimal-contracting theory, 335–337
stock options, growth in use of, 334–335
traditional contracting theory, 335–336
executive incentive measurement, 233
CEO and shareholder wealth relationship, 233–237
CEO wealth and stock-price volatilities relationship, 237–241
executive pay measurement, 217–218
cost vs. value of incentive compensation, 228–233
grant-date vs. realized pay, 218–228
managerial power camp, 321–322, 330
growth in use of stock options, 332–333
overpaying newly hired CEOs, 332
trends in CEO pay, 330–331
perceived cost view, 338–339
“Economic Value Added” programs, 342
executive pay and S&P 500 Index relation, 340
non-qualified stock options, 341–342
problem with, 342
scarcity of “indexed options”, 340
stock options, 340
systematic suboptimal decision-making, 340–341
politics of pay, 342–343
bills, 344–345
Corporate Pay Responsibility Act, 344
explosion in stock options, 343
NYSE listing requirements, 344
salaried middle managers, 249–250
Executive pay
congressional outrage over, 214–215
controversies over, 213
measurement, 217–218
cost vs. value of incentive compensation, 228–233
grant-date vs. realized pay, 218–228
Executive stock options, 273
Expectations market, 326
F
FASB. See Financial Accounting Standards Board
FDI. See Foreign direct investment
Federal Deposit Insurance Corporation (FDIC), 39
Federal Reserve System
ABCP conduits, 56
AMLF, 58
CPFF, 58
lending facilities, 56–57
PDCF, 57
in repo transaction, 56
SFP, 58
TSLF, 56–57, 59
Federal Trade Commission (FTC), 251
Fender and Mitchell model, 42
Financial Accounting Standards Board (FASB), 264, 279–280
accounting treatment of options, 281
Corporate Pay Responsibility Act, 280
FAS 123 rule, 281
proposal, 280
repricing activities, 282
Financial development, 426
capital allocation efficiency, 440
changes in, 444
investor protection, 440
legal origin influences, 445
Financial intermediation model, 54
Financial markets, 434–435, 764, 768
bond markets, domestic, 768–770
corporate bond market underdevelopment, 770
debt markets, 438
development, 770–771
financial institutions and capital markets development, 430
LLSV specifications, 435
market capitalization of listed firms, 769
stock markets, 768
top and bottom panels, 435
Financial policy
See also Managerial biases approach; Market timing and catering approach
capital structure, 385, 403–404
evidence, 385
leverage, 386
contracting, 404–405
cross-border issues, 382–383
debt issues
credit risk models, 382
long-term debt, 381
short-term debt, 381
equity issues, 401–402
IPO, 377
IPO samples, 377–378
misvaluation, 378
overvaluation, 376–377
pseudo market timing, 379
survey evidence, 379–380
executive compensation, 405
financial intermediation, 383
dislocations, 384
feature, 384–385
private equity transactions, 383
IPO prices
file price range, 402
offer price, 402–403
raising debt, 403
anchoring, 403
reference point prices, 403
repurchases
at firm level, 380
survey evidence, 380–381
undervaluation, 380
Financial system state, 763–764
alternative sectors, 775
firm financing channels, 776
heterogeneities within countries, 776–778
bank credit, 764
banking sector and financial markets, 764
banking sector
bonds composition, 768
gap, 765–768
stock market concentration, 766–767
corporate bond markets, 765
financial development, 765
financial markets, 768
bond markets, domestic, 768–770
corporate bond market underdevelopment, 770
debt markets development, 770–771
and intermediaries, 764
market capitalization of listed firms, 769
stock markets, 768
intermediation sector
bonds composition, 768
capital alternative sources, 765–768
stock market concentration, 766–767
international sectors
currency swap markets development, 773
currency swap turnover and foreign currency bond issuance, 775
domestic and international debt markets, 772–773
domestic and international debt securities, 772, 774
firm financing channels, 773
international financial markets, 770–771
outcome measures, 770–771
risk management and comparative advantage, 773
small and medium firms, 771–772
national financial systems, 765
Financing constraints, 716
DAG methodology, 718
financial, legal, and corruption obstacles, 717
impact of obstacles on firm growth, 717
policy prescriptions, 717
Financing in developing countries
institutions and access, 704
finance and growth, 704–707
government intervention, corruption, and political ties, 714–716
information quality and availability, 712–714
legal traditions and property rights, 707–712
stylized facts about firms
banking systems development, 689
banks vs. markets, 688–689
capital structure choices, 686–688
concentrated ownership and separation, 686
concentrated ownership around world, 687
corporate finance, 686–692
cross-border mergers, 690
external financing patterns of fixed asset investment, 688
foreign capital accessing, 689–690
industry structure and entrepreneurship, 691
informal firms, 691
productivity, 690–691
small firms role, 691
stock market capitalization, 690
Firm financing in developing countries, 716
cash holdings and liquidity management, 721–722
financing constraints, 716
DAG methodology, 718
financial, legal, and corruption obstacles, 717
obstacles on firm growth, impact of, 717
policy prescriptions, 717
firm financing patterns
country-specific factors, 719
domestic firms, 719
Enterprise Surveys, 720–721
firm’s leverage choices, 718
institutional factors, 720
long-term debt for short-term debt, 718–719
public firms, 720
WBES, 720
issuance activities, 722
international capital issuances, 723–726
IPOs, 722–723
private equity and venture capital, 726–727
small firm financing
Enterprise Surveys, 728
financial liberalization episodes, 728
overdraft facility, 735
SME access to bank accounts, line of credit, 730
SMEs and access to finance, 729–730
using US Census data, 731
WBES, 727–728
young firms, 731–734
Firm manager, 74
Firm’s capital stock, 98
Firms in developing countries
empirical research issues, 697
country-level variables, 700
in cross-country studies, 700
economic growth and growth regressions, 702
financial literacy, 697
industry growth equation, 698–699
using instrumental variables, 699
instrumental variables, 701
large scale multi-country firm surveys, 703
LATE, 702–703
using multivariate techniques, 698
natural experiments, 697–698
using panel-study methods, 701
pseudo-placebo effect, 701
using quasi-experimental techniques, 701–702
Rajan–Zingales approach, 699
RCTs, 697
variables, measurement of, 703–704
firms models
bare-bones intuition, 694
capital structures and industry concentration, 695
conglomerate firms, 693
firm size and productivity, 696
formal firms, 696
formation of pyramidal firms, 694
full capital mobility and no capital mobility, 692–693
informal firms, 696
investor protection, 693
market imperfection, 692
non-monotonic relation, 693
NPV projects, 695
pyramidal firms, 694
theoretical models, 692
two-country equilibrium model, 692
Firms’ financing channels, 778
alternative financing channels, 780–782
family and friends and seed capital forms, 785–788
private credit agencies, 785
trade credit, 782
alternative financing channels, 750
data issues, 788–789
financing channels in India, 787
firm financing channels across sectors in China, 781
traditional and alternative financial sectors, 789
comparing forms of financing, 792–793
future research on alternative finance, 794–795
legal and alternative institutions development, 793–794
Fixed effect, 557–558
Hausman test rejects, 558–559
least squares dummy variable regression, 558
Foreign capital accessing, 689–690
Foreign direct investment (FDI), 374–375, 689–690
Foreign tax credit (FTC), 165
Formal firms, 696
Formal systems, 740
using financing channels, 741
financing patterns in emerging markets, 742
formal financing channel, 741
higher growth or productivity, 743
limitations, 741
private sector firms, 741
Four-factor model, 661
Franchise value. See Charter value
FTC. See Federal Trade Commission; Foreign tax credit
Fuzzy RDD, 536
estimation, 544–545
mis-assignment, 536–537
treatment assignment probability, 536–537
treatment effect identification, 537–539
G
General Growth Properties (GGP), 38
General Partner (GP), 575–576
German legal tradition, 431
GGP. See General Growth Properties
Glaeser and Kallal model, 41
Golden parachutes, 267–272, 301–302
change-in-control arrangements, 269
change-of-control agreements, 268–269
payment, 269–270
proliferation of Employment Agreements for CEOs, 271
Gorton and Souleles model, 43–44
Governance, 761
alternative finance, 762
corporate bond markets, 765
mechanisms, 778, 780–782
Government-supported VC firms (GVC firms), 609
GP. See General Partner
Grant-date pay, 218
average compensation, 222–224
for CEOs, 224–225
bonus plans, 219
CEO compensation, 220–221
exercise gains, 223–224
expected compensation, 218–219
level and compensation evolution, 228
median compensation, 223–224
grant-date compensation for CEOs, 226–227
non-equity incentives, 221
realized pay, 220
confusion with, 220
distinction with, 219
SEC Total Compensation, 220
SEC uses, 219–220
selection bias, 226–227
survivor bias, 227
2011 pay for CEOs in S&P 500 companies, 222–223
Grate-date pay, 219
Great Depression, 250
Greenbaum and Thankor model, 42
Greenmail payments, 268
Gross returns, 620
focus, 620
measures of, 620
GVC firms. See Government-supported VC firms
H
Hall-Liebman measure evolution, 236
Hand-collected survey data, 578
CorpTech, 578
cross-check hand-collected data, 578
Kauffmann firm survey, 578
Hostile takeover artists, 267–268
Hot market, 112
Hubris-based theory, 399
I
Idiot son problem, 657
Implicit recourse, 40
Impulse response concept, 118
Incentive compensation
cost vs. value, 228–229
certainty equivalents, 231
dilution, 229–230
exercise options, 229–230
forfeiture, 229–230
non-tradable option value, 230
risk aversion, 233
risk-adjusted pay evolution, 232
Incentive stock option (ISO), 189–190, 266
Infinite-horizon model, 112–113
Informal firms, 691, 696
Informal systems, 740
using financing channels, 741
financing patterns in emerging markets, 742
higher growth or productivity, 743
limitations, 741
prevalence and effectiveness, 740–741
private sector firms, 741
Initial public offering (IPO), 148, 685, 722–723
angel financing matters, 603–604
favorable analyst revisions, 602
post-IPO performance, 601, 603
price performance, 603
private information, 603
VC-backed companies, 601–602
venture capitalist, 602
Innovation, 634–635
Institutional investors
CVC, 607
LPs, 579
VC firms, 575–576, 604
Institutional Shareholder Service (ISS), 311
Institutions and access to finance in developing countries
finance and growth
entrepreneurship channel, 706
financial development and economic growth dependent variable, 705
using financial planning model, 705–706
growth indicators, 704
industry-level data and computes investment elasticity, 706
pure cross-country evidence, 705
using stock market turnover ratio, 704–705
use enterprise surveys, 706–707
government intervention, corruption, and political ties, 714
with corruption and inefficiencies, 714–715
cross-country and country-specific studies, 715
political connections, 715
political favors influence financing, 715–716
politically motivated loans, 715–716
information quality and availability, 712
accounting standards, 712–713
developed capital markets, 712
firm’s information environment, 712
opaque firms, 714
primary sources, 712
private and public credit registries, 714
quality of disclosure practices, 713
small firms, 713
US data, 713
legal traditions and property rights
Civil Law tradition, 707–708
corporate governance, 708
using Directed Acyclic Graph methodology, 711
geography and disease environment role, 709–710
institutional determinants of property rights protection, 711
institutional variables and firm-level variables, 710
law and finance view, 707–708
legal origin, laws, and enforcement, 709
legal traditions, 708
modern corporate finance, 707
quality of property rights protection, 708–709
strong creditor rights, 711–712
Instrumental variables (IV), 511, 699
instrument validity
assumption, 515
testing, 515–516
lagged instruments
book leverage ratio, 518
Euler equation, 517
justification, 518
limitations, 518–519
external validity, 519
implementation, 519
internal validity, 519
2SLS, 513
valid instruments
family CEO succession, 514–515
instrument z, 511–512
instruments (m), 513
single equation linear model, 511
weak instrument problem, 516
detection, 516
macroeconomic applications, 516
two-stage least squares, 516
Interest tax deductibility, 149
Intermediation sector
bonds composition, 768
capital alternative sources, 765–768
stock market concentration, 766–767
Internal Rate of Return (IRR), 622–623
Internal Revenue Service (IRS), 253
International capital issuances
beneficial ramifications, 724
bonding hypothesis, 724
controlling blockholder’s voting rights, 725
financial markets, 723
internationalization, 725–726
probability of cross-listing, 725
segmentation hypothesis, 723
theories and empirical evidence, 726
US cross-listing premium, 726
well-regulated markets, 724
International pay comparisons
EU pay premium, 314
level and structure, 316–318
stock-based pay, 319
multi-country pay comparisons, 313
US CEO’s option facility, 318
cross-country differences, 320
equity-based compensation, 318
equity-based pay evolution, 320–321
equity-based pay use, 319–320
incentive-based pay use, 319–320
US option explosion, 321
US pay premium, 313–314
CEO pay, 315, 317
evidence, 318
evolution of, 315–316
firm characteristics, 315
level and structure, 316–318
stock-based pay, 319
International Swaps and Derivatives Association (ISDA), 33
Internet firms, 363
Investment memoranda, 593
Investment policy, 368–369
See also Managerial biases approach; Market timing and catering approach
conglomerate valuations, 376
diversification and focus, 375–376
mergers and acquisitions, 374–375
hubris-based theory, 399
options-based proxy, 399–400
reference point, 400–401
Shleifer-Vishny framework, 375
real investment
Capital Asset Pricing Model, 399
entrepreneurial startups, 397
financially constrained firm, 373–374
IRR rule, 398
loss aversion, 399
manager-level proxy, 397–398
mispricing, 372–373
optimism, 397
Investor protection, 434–435
bankruptcy laws, 435
civil law, 438
evidence, 438
financial institutions and capital markets development, 430
higher income per capita, 438
LLSV specifications, 435
top and bottom panels, 435
IPO. See Initial public offering
IRR. See Internal Rate of Return
IRS. See Internal Revenue Service
ISDA. See International Swaps and Derivatives Association
ISO. See Incentive stock option
ISS. See Institutional Shareholder Service
Issue bonds, 4
IV. See Instrumental variables
K
Knee-jerk reactions, 249
L
La Porta, Lopez-de-Silanes, Shleifer, & Vishny (LLSV), 426
follow-up research, 427
judicial procedures and judicial independence, 427
legal origins influence, 426–427
legal rules protecting investors, 426
proposition and contributions, 426
Lagged instruments
book leverage ratio, 518
Euler equation, 517
justification, 518
Large Enterprises in manufacturing sector (LE-M), 788
Large Enterprises in services sector (LE-S), 788
LATE. See Local average treatment estimator
Law and finance, 426–427, 434–435
civil law, 438
common and civil law, 427–428
corporate laws, 426
research, 439
Scandinavian laws, 431
securities laws, 434–435
in general and disclosure rules, 460
market-supporting regulations, 476–477
perceived social needs, 457–458
LBD. See Longitudinal Business Database
LBO. See Leveraged buyout
LE-M. See Large Enterprises in manufacturing sector
LE-S. See Large Enterprises in services sector
Legal origins, 427–428
alternative historical explanations, 450
civil law tradition, 430–431
common and civil law, 427–428
common law
and French civil law, 432
legal tradition, 430
corporate ownership, 441–442
creditor protection consequences, 442–443
creditor rights, culture, and legal origin, 456
and culture, 460–461
distribution of, 430
divergence explanations, 476–477
economic consequences, 450
explanations based on medieval developments
empirical predictions, 455
French crown, 454
French revolutions, 454
theoretical model, 455
explanations based on revolutions, 451
adaptability of common law, 454
codification logic, 452
common law, 453
cross-country analysis, 452–453
French courts, 452
French judiciary, 451
German law, 453
judiciary diminution, 452
jurisprudence, 453
key implications, 453
law and procedure codes, 452
rationalist approach, 451
financial markets, 434–435
debt markets, 438
financial institutions and capital markets development, 430
LLSV specifications, 435
top and bottom panels, 435
French civil law tradition, 431
French legal origin countries, 431
German legal tradition, 431
and history
component parts, 469
financial markets, 469
historical critique, 469
hypothesis challenge, 465–469
shareholder protection, 469
information transmitted, 428
interpretation of evidence
evidence on government regulation, 459
legal rules protecting investors, 460
in light of Legal Origins Theory, 459
shareholders and creditors, 459
statutory protection, 460
investor protection, 434–435
bankruptcy laws, 435
civil law, 438
evidence, 438
financial institutions and capital markets development, 430
higher income per capita, 438
LLSV specifications, 435
top and bottom panels, 435
legal infrastructure, 429
legal origins beyond finance, 446
government regulation, 446–448
judicial independence contribution, 448
judicial institutions, 448–450
two-standard deviation, 448
legal rules vs. law enforcement, 445–446
legal scholars, 428–429
legal traditions, 429
legal transplantation, 431–432
organizing evidence, 433
cross-country studies, 434
data, 433
legal origin, institutions, and outcomes, 433
legal rules and institutions, 434
LLSV variables, 434
studies, 434
and politics, 464, 466–467
countries with autocratic governments, 468
explanatory power, 461
labor regulation, 465
political alliances, 461
political story, 461–464
political variables, 465
Swedish system, 464
re-classification of transition economies, 432
reforms
bond markets development, 444–445
Draghi reforms, 444
evidence on credit markets, 444
instrumental variable techniques, 443–444
Scandinavian laws, 431
secular legal traditions, 429
shareholder protection consequences, 439–441
socialist legal tradition, 429
stock markets, 470
Britain, 473
capitalization, 469–471, 473–475
corrections, 472
Cuba, 470
Cuba and Egypt non-randomly, 472
England and France, 472
French civil law country, 470–472
GDP, 472–473
stock markets in Britain, 473–476
substitute mechanisms, 443
tunneling, 438–439
variables and sources, 478–483
Legal Origins Theory, 427–428, 455
civil law features toolkit, 457
common law, 458
economic historians, 457–458
excessive regulation, 458–459
legal system, 456
social control system, 459
terrorism, 458
twin problems, 455–456
Lemons-type model, 48
Leveraged buyout (LBO), 175, 268
Limited Partner (LP), 575–576
differences in returns, 628–629
Lintner model, 409–410
LLSV. See La Porta, Lopez-de-Silanes, Shleifer, & Vishny
Local average treatment estimator (LATE), 702–703
Longitudinal Business Database (LBD), 579
Longitudinal Research Database (LRD), 579
LP. See Limited Partner
LRD. See Longitudinal Research Database
M
Mainstream finance theory, 662
Managerial biases approach, 359, 369
See also Behavioral corporate finance
anchoring, 393
bounded rationality, 392
corporate decisions, 396
empirical challenges, 396–397
financial policy, 395–396, 401–405
goals
maximizing perceived fundamental value, 394
minimizing perceived cost of capital, 394
investment policy, 395, 397–401
limited governance, 391–392
optimism, 392–393
overconfidence, 393, 396
reference points, 393
Managerial power hypothesis, 324
Managerial power camp, 214–215, 321–322, 330
growth in use of stock options, 332–333
overpaying newly hired CEOs, 332
trends in CEO pay, 330–331
Marginal tax rate (MTR), 142–144
Market timing and catering approach
See also Behavioral corporate finance
anchoring, 364–365
categorization, 363
Internet firms, 363
investor sentiment, 363–364
Nifty Fifty, 363
challenges
calendar-time portfolios, 371
cross-sectional Interactions, 372
ex ante misvaluation, 370
ex post misvaluation, 370
non-fundamental investor demand, 371–372
statistical issues, 371
corporate decisions, 386–391
disposition effect, 364
dividend policy, 369–370
financial policy, 369, 376–386
goals
exploiting current misprice, 367
maximizing current share price, 366–367
maximizing fundamental value, 366
investment policy, 368–369, 372–376
irrational investors, 361
limited arbitrage
classical finance theory, 362
risks, 363
in Treasury yield curve, 363
managerial horizon, 368
prospect theory, 364
smart managers, 362, 365–366
Market-finance, 760
Markets
corporate bond, 765
financial, 768
corporate bond market underdevelopment, 770
debt market development, 770–771
domestic bond markets, 768–770
market capitalization of listed firms, 769
stock markets, 768
timing approach, 359
Martingale representation theorem, 93
Master trusts’ activities, 8–9
Masulis’s tax hypothesis, 133
Matching methods, 549
assessment
falsification tests, 553
overlap assumption, 554
propensity score matching, 554
regression estimators, 553
unconfoundedness assumption, 553
ATE, 550, 552–553
distance metric, 555
propensity score, 551
covariates, 556–557
estimation, 555–556
quality, 556
replacement, 556
recognition, 549
treatment effect, 550
overlap, 550
unconfoundedness, 549–550
MBS. See Mortgage-backed securities
Measurement error, 500
in dependent variable, 501
correlation, 502
estimable model, 501
population model, 501
in independent variable, 502
classical errors-in-variables assumption, 503
in corporate finance, 504
population model, 502–503
probability limit, 503
Measurement error econometric solutions
avoiding proxies, 566
high order moment estimators, 562
consistent estimator, 562
GMM test, 563
straightforward algebra, 563–564
instrumental variables
entrenchment, 561
explanatory variable, 560–561
measurement equations, 561–562
proxy variables, 560
reverse regression bounds, 564
market-to-book ratio, 565
regression and measurement equations, 564
tangibility, 565
Median grant-date compensation
equity-based compensation, 297
firms in 1992 S&P 500, for CEOs in, 227
Hall and Liebman, for CEOs in, 273
non-S&P 500 firms, for CEOs in, 228
in S&P 500 firms, for CEOs, 226, 275, 296
MERS. See Mortgage Electronic Registration System
Metropolitan Statistical Area (MSA), 633–634
Miller equilibrium, 150
MIPS. See Monthly income preferred stock
MM. See Modigliani and Miller
MMMF. See Money market mutual fund
Modern Industrial Revolution, 266–267
Modigliani and Miller (MM), 125
propositions, 72–74
theory, 71–72, 362
Money market mutual fund (MMMF), 31–32
Monthly income preferred stock (MIPS), 135
Moral hazard, 75
agency problem, 78
complex dynamic models, 81–82
debt face value, 78
optimal contract theorem, 76–78, 80
optimal contracting problem, 75
optimal investment, 78
possible outcomes, 79
principal’s gross profit, 79–81
principal’s payoff, 78
profitable project, 75
revelation principle, 79
simple two-period model, 78
standard debt contract, 76
truth-telling constraints, 75–76
truth-telling contracts, 75
Mortgage Electronic Registration System (MERS), 39–40
Mortgage-backed securities (MBS), 2
MSA. See Metropolitan Statistical Area
MTR. See Marginal tax rate
Multi-country pay comparisons, 313
Multi-period model, 406–407
Multinational tax issues, 163
empirical evidence relation
interest allocation influence, 173
international tax incentives, 172
prediction 11, 170
predictions 12 and 13, 172
predictions and empirical evidence, 171
tax issues varieties, 172
testing multinational tax hypotheses, 170
using expression, 163
multinational tax incentives, 173–174
profits earning abroad repatriation, 174–175
foreign profits, 174
low tax rates repatriation, 174
repatriation taxes, 174
tax executives state, 174–175
tax incentives and financial policy
classical tax system, 170
deficit credit firm, 165
domestic interest deduction, 169
FTC and interest allocation rules, 164–165
full imputation tax system, 170
interest allocation procedure, 166
multinational corporate financing decisions, 166
multinational corporation, 164
one-period model, 166–168
using prediction, 165, 169
tax incentives, 169
US and overseas, 168–169
US-based multinational firms, 164–165
N
National Association of Security Dealers (NASD), 282–283
National financial systems, 765
National Venture Capital Association (NVCA), 580
NAV. See Net asset value
NDTS. See Nondebt tax shields
Net asset value (NAV), 624
Net operating loss (NOL), 144–145, 175
Net Present Value (NPV), 622–623
New Endogenous Growth Theory, 650
New York Stock Exchange (NYSE), 254, 284–285
backlash against explosion, 288
broad-based option grants, 287–288
broad-based plan, 285
employee stock options
grant-date number of, 286
grant-date values of, 286–287
facing barrage of criticism, 285
Nifty Fifty, 363
1972 APB Opinion 25, 279
fixed accounting, 281–282
Nixon wage-and-price controls
See also Restricted stock options in America, 259
average compensation level and structure, 260–261
before-tax CEO compensation, trends in, 261
controversy over perquisites, 261–263
expiring, 260
Modern Industrial Revolution, 266–267
negative net-present-value project, 267
no accounting for options, 263–264
non-qualified stock options, 260
reducing executives incentives, 259–260
rise and fall of SAR, 264–265
NOL. See Net operating loss
Non-equity pay, 224–225
Non-fundamental investor demand, 371–372
Non-linear pay-performance relations, 247–248
big bath phenomenon, 243
imposing negative bonuses, 243–244
non-linearities effect, 243
problems with, 242–243
Non-pecuniary benefits, 263
Nondebt tax shields (NDTS), 132, 141, 193
Nonqualified stock option (NQO), 189–190, 257–259
Norwalk two-step, 11
NPV. See Net Present Value
NQO. See Nonqualified stock option
NVCA. See National Venture Capital Association
NYSE. See New York Stock Exchange
O
Oligarchs, 668–669
advantages, 671
agency problem magnification, 668
Anglo-American capitalism, 669
Big Push industrialization, 670
catch up economic development, 670
empirical importance, 671
pyramiding, 667–668
robber baron capitalism, 669
rule, 670–671
Omitted variables, 498
economic relation, 498
with economic theory, 499
estimable population regression, 498
OLS estimation, 499
“One-size-fits-all” solution, 328
Optimal cash flow theories
contingent control structure, 591
continuous time moral hazard model, 591
CPE, 589–590
double moral hazard model, 590
ex-post bargaining game, 592
non-contractible value-adding advice, 590
using non-standard definition, 592
optimal contract, 591
terminating vs. refinancing venture, 590–591
variety of modeling assumptions, 592
VC contracts, 589–590
Optimal dynamic contracts, 117
with adverse selection, 119
cash flows, 118
credit line, 119
distribution, 120
future asymmetric information, 117
impulse response concept, 118
optimal credit limit, 120
public information, 117
Optimal dynamic security design, 90–91
agency problem, 91
agent’s compensation, 94
cash flow stream, 91
comparing, 100–101
constrained optimization problem, 92
continuation payoff, 92–93
continuous non-decreasing process, 91
continuous-time formulation, 97
credit line involving, 96
under dynamic moral hazard, 91
dynamic moral hazard, 102
adjustable-rate mortgages, 103
agent’s continuation value, 105–106
BMRV model function, 110
boundary conditions, 107–108
cash flow, 105
continuous stream of payments, 111
dynamic agency model, 104–105
using equations, 106
incentive-compatible contract, 103
investment function, 109–110
maximal risk prevention, 109
optimal contract form, 107
optimal mortgage design, 102–103
performance-related information, 108
Poisson switching process, 103–104
principal’s value function, 103–104
scale-invariance properties, 109
using equation, 102
firm’s capital stock, 98
martingale representation theorem, 93
Modigliani–Miller theorem, 97
optimal contract, 94
optimal contracting problem, 99
perpetual debt, 96–97
phase diagram, 95–96
poor performance, 97–98
predictions, 101
principal’s security equation, 94
principal’s value function, 99
second-order ordinary differential equation, 94
stochastic control problem, 93
two-period model, 91
Optimal mortgage design, 102–103
Optimal sharing rate, 335
Option backdating, 290
Cablevision’s award, 291
changes in reporting requirements, 291–292
disclosure rules, 292
issuing options with exercise prices, 292
SEC investigations, 290–291, 293
unsavory practice violation, 290–291
Option Delta, 234, 238–239
“Overhang”, 339
P
Panel data methods, 557
fixed effect, 557–558
Hausman test rejects, 558–559
least squares dummy variable regression, 558
random effects, 557–558
Parallel trends assumption, 526, 528
Pay and governance reforms, 308–309
additional disclosures, 309–310
CEO-to-worker pay, ratio of, 312
clawbacks, 309, 312
compensation committee independence, 310, 312
proxy access, 310, 312
Say-on-Pay regulation, 309
changes to compensation practices, 311
competitive and incentive challenges, 311
non-binding shareholder votes, rulings for, 311
unintended consequence, 311
Pay Czar, 306–307
Pay for Performance Act, 306
Pay restrictions for TARP recipients
ARRA amends EESA, 302–307
EESA, 301–302
Pay-Performance Sensitivity, 235–236
Payout policy. See Taxes and payout policy
PDCF. See Primary Dealer Credit Facility
Perceived cost view, 338–339
“Economic Value Added” programs, 342
executive pay and S&P 500 Index relation, 340
non-qualified stock options, 341–342
problem with, 342
scarcity of “indexed options”, 340
stock options, 340
systematic suboptimal decision-making, 340–341
PME. See Public Market Equivalent
Poison pills, 268
Poisson switching process, 103
Political, legal, and regulatory system, 327–329
Pooling, 41
Post-IPO performance, 601, 603
Potent priority, 660
PPP. See Purchasing power parity
Preqin, 580
Primary Dealer Credit Facility (PDCF), 57
Private equity firms, 726–727
Private equity investment returns, 630–631
Product markets, 328–329
Profitable firms, 141
Proprietary industry data, 579
Proxy Access, 310, 312
PSU. See Public Sector Undertakings
Public interest standard, 307
Public Market Equivalent (PME), 622
Public policy
complementarity, 636
econometric challenges, 635
establishing and regulating stock markets, 635
innovation, 634–635
labor market rigidities, 635–636
public pension funds, 635
regional innovation and entrepreneurship, 636
SBIR program, 636
for venture capital, 634–635
Public Sector Undertakings (PSU), 779–780
Pump and dump strategy, 248
Purchasing power parity (PPP), 762
Pyramiding, 667–668
Q
Qualified stock options, 257, 261–263
See also Non-qualified stock options; Restricted stock options
popularity of, 258–259
resurrection, 265–266
tax advantage reduction, 258
R
Random effects, 557–558
Randomized controlled trials (RCTs), 697
advantages to, 701
controversy about, 701
in development economics, 697
in finance research, 697
heterogeneity, 702–703
and natural experiments, 697–698
Rank-and-File Stock Option Act, 345
RCTs. See Randomized controlled trials
RDD. See Regression discontinuity design
RDLP. See Research and development limited partnership
Real market, 326
Real-time gross settlement systems (RTGS), 34
Realized compensation, 218–219
Realized pay, 218
average compensation, 222–224
CEO compensation, 220–221
exercise gains, 223–224
expected compensation, 218–219
grant-date pay
confusion with, 220
distinction with, 219
median compensation, 223–224
non-equity incentives, 221–222
SEC total compensation, 220
SEC uses, 219–220
2011 pay for CEOs in S&P 500 companies, 222
Recombinant capital, 580
Reconstruction Finance Corporation (RFC), 251
Regional Program on Enterprise Development (RPED), 720
Regression discontinuity design (RDD), 531–532
checking internal validity, 546
balancing tests and covariates, 547–548
falsification tests, 548–549
manipulation, 546–547
features, 532
financial covenants, 532
fuzzy RDD, 536
estimation, 544–545
mis-assignment, 536–537
treatment assignment probability, 536–537
treatment effect identification, 537–539
graphical analysis
bin dummies, 541
F-test, 540–541
features, 540
regression, 539
treatment effects, 541
parametric estimation, 545–546
sharp RDD, 533
estimation, 541–544
key assumption, 533
treatment assignment, 533–534
treatment effect identification, 533–536
Regression framework
measurement error, 500
in dependent variable, 502–504
in independent variable, 496
omitted variables, 498
economic relation, 498
with economic theory, 499
estimable population regression, 498
OLS estimation, 499
simultaneity, 499–500
population estimation, 500
quantity supply, 500
single equation linear model, 497
assumptions, 497–498
parameter estimation, 497
Reporting biases, 621–622
Research and development limited partnership (RDLP), 176
Residential mortgage-backed securities (RMBS), 2–3
Restricted stock, 191
Restricted stock options, 254, 263
See also Qualified stock options
before-tax CEO compensation, trends in, 255–256
favorable tax treatment for options, 256–257
restriction modification on, 256
rise of, 253
Salary Stabilization Board’s rules, 255
tax advantage comparison, 257–258
tax issue, 254
RFC. See Reconstruction Finance Corporation
Risk management, 773
RMBS. See Residential mortgage-backed securities
Robber baron capitalism, 669
RPED. See Regional Program on Enterprise Development
RTGS. See Real-time gross settlement systems
S
Salaried middle managers, 249–250
Salary Stabilization Board’s rules, 255
SAR. See Stock appreciation rights
Sarbanes-Oxley Act, 288
clawback provision of, 288–289
prohibiting personal loans, 288
stock options, disclosing new grants of, 289
Say-on-Pay resolutions, 303–305, 309
compensation practices, changes to, 311
competitive and incentive challenges, 311
non-binding shareholder votes, rulings for, 311
unintended consequence, 311
SBIR program. See Small Business Innovation Research program
SCF. See Survey of Consumer Finances
Schumpeter’s psychic reward, 658
SEC. See Securities and Exchange Commission
Secondary loan participation, 12
Section 280(G), 267–272, 269
base compensation under, 270–271
employment agreements for CEOs, proliferation of, 271
executive compensation, impact on, 270
government action, 271
rising “tax gross up”, 270
Section 409(A), 294–295
Securities and Exchange Commission (SEC), 252
CEO pay, 299–300
conflicted consultants, 298–300
disclosure requirements, 299–300
Holding Period Rules, 276–277
Option Disclosure Rules, 282
grant-date Black–Scholes cost, 283
Grant-Date Pay for CEOs, 283–284
non-equity compensation, 283
quantifying option, 282–283
Securities in dynamic models
agent, 90
bankruptcy firm, 89
Brownian motion, 87
capital structure, 88
debt and bankruptcy costs, 88
debt overhang, 88
endogenous bankruptcy, 90
endogenous bankruptcy choice, 88
Merton model, 90
optimal dynamic security design, 87
security-pricing equation, 89
smooth-pasting condition, 89
Securities Industry and Financial Markets Association, 34
Securities laws, 433–435
in general and disclosure rules, 460
market-supporting regulations, 476–477
perceived social needs, 457–458
Securitization, 2, 5–6
bank profits, 27
bankruptcy, 9
remoteness, 11
Basel III rules, 60–62
chase issuance trust, 7–8
Delaware statutory trust, 8–9
features, 9
outstanding receivables, 11
two-tiered structure, 7
default events, 9–10
demand deposits, 29
Dodd-Frank Act, 62
European selected non-mortgage issuance, 2–4
Federal Reserve System
ABCP conduits, 56
AMLF, 58
CPFF, 58
lending facilities, 56–57
PDCF, 57
in repo transaction, 56
SFP, 58
TSLF, 56–57, 59
and financial innovation, 35–36
Bankruptcy Abuse Prevention and Consumer Protection Act, 38
Bankruptcy Reform Act, 38
Delaware Business Trust Act, 36–37
Delaware’s laws, 37
FDIC, 39
MERS, 39–40
trusts, 36
financial stability
asset-backed securities, 53
financial intermediation model, 54
risk-taking capacity, 55
short-term debt, 54–55
forms
ABCP, 12–13
CDO, 13
CLO, 13
loan sales, 12
SIV, 13
investors
in off-balance sheet debt, 27
in on-balance sheet debt, 26
issue bonds, 4
legal structure, 5–6
monetary policy
on bank lending, 59–60
liquidity policy, 59
mechanisms, 59
open questions, 62–65
origins, 29–40
pooling and servicing agreement, 11–12
role in US economy, 2
debt issuance vs. non-agency securitization issuance, 2–3
mortgage related securities issuance, 2–4
non-mortgage ABS issuance vs. corporate debt, 2–3
securitized bonds, demand for
collateral use, 35
convenience yield of, 32
features, 33
ISDA survey, 33
repo market, 34
RTGS system, 34
securitized bonds supply, 29–30
CP, 31
demand deposits, 30
junk bonds, 31
MMMF, 31–32
sources of value, 27–28
SPV, 5
Thomson Reuters, SIFMA, 60–61
tranches, 2, 7
Securitization decision model, 25
bank’s expected profit, 26
lowest promised repayment amount, 25
motivation, 26
on-and off-balance sheet positions, 27
on-balance sheet debt, 26
one-period loans, 25
SPV, 26
bank profits, 27
off-balance sheet debt, 27
on-balance sheet debt, 26
traditional bank business model, 26
value sources to, 27–28
bankruptcy costs, 28
bankruptcy optionality, 28
relative convenience yield, 29
tax, 28–29
Securitized bond
Demand for
collateral use, 35
convenience yield of, 32
features, 33
ISDA survey, 33
repo market, 34
RTGS system, 34
supply, 29–30
CP, 31
demand deposits, 30
junk bonds, 31
MMMF, 31–32
Security design, 40, 42
adverse-selection problem, 49
Alt-A mortgage, 49–50
benefits, 52–53
capital structure design, 41
CLO, 48–49
CMBS market, 45
corporate loans, 44
DeMarzo model, 41
features, 42–43
Fender and Mitchell model, 42
Glaeser and Kallal model, 41
Gorton and Souleles model, 43–44
Greenbaum and Thankor model, 42
implicit recourse, 51–52
lemons-type model, 48
loans, 40
moral-hazard problems, 46–47
regulatory arbitrage, 50
caveat, 51
CC securitizations, 51
return differential components
bankruptcy costs, 45–46
taxes, 46
two-step process, 41–42
Selection bias, 226–227
Self-reporting bias. See Selection bias
Serial entrepreneurs, 584–585
SERP. See Supplemental executive retirement plan
SFP. See Supplementary Financing Program
Shareholder awakening, 272
high-yield debt market, 272
median level and average structure of CEO
compensation, 272–273
value creation, 272–273
Sharp RDD, 533
estimation, 541–544
key assumption, 533
treatment assignment, 533–534
treatment effect identification
average outcomes comparison, 535
conditional expectation, 535
heterogeneous effect model, 536
simple regression, 533
Short-swing profit rule, 276, 326
Simulated marginal tax rates
using financial statement, 144–145
Myers’s capital structure puzzle, 143–144
using simulated corporate marginal tax rates, 145
using simulation techniques, 144
Simultaneity regression framework, 499–500
population estimation, 500
quantity supply, 500
Single equation linear model, 497
assumptions, 497–498
parameter estimation, 497
SIV. See Structured investment vehicle
Skewness in pay distribution, 226
Small and Medium Enterprise (SME), 685, 761, 788
access to bank accounts, line of credit, 730
and access to finance, 729–730
Small and Medium Enterprises in manufacturing sector (SME-M), 788
Small and Medium Enterprises in services sector (SME-S), 788
Small Business Innovation Research program (SBIR program), 636
Small firm financing
Enterprise Surveys, 728
financial liberalization episodes, 728
overdraft facility, 735
SME access to bank accounts, line of credit, 730
SMEs and access to finance, 729–730
using US Census data, 731
WBES, 727–728
young firms, 731–734
Small firms, 684
SME. See Small and Medium Enterprise
SME-M. See Small and Medium Enterprises in manufacturing sector
SME-S. See Small and Medium Enterprises in services sector
Social capital determinants, 589
Socialist legal tradition, 429
SOE. See State-owned enterprise
Special Master. See Pay Czar
Special purpose vehicle (SPV), 2, 26
SPV. See Special purpose vehicle
Staggered boards, 268
Standard and Poor’s default rate, 15–16, 21
Standstill agreements, 268
State-owned enterprise (SOE), 779–780
Static contracts, 111–112
with adverse selection, 112
dynamic asset market, 114
equilibrium, 116–117
high-quality firms, 112
HJB equation, 115–116
infinite-horizon model, 112–113
investment opportunities, 113
non-decreasing process, 115
parameter restrictions, 113
recursive equations, 113
striking observation, 116
Static models, informational problems in, 74
adverse selection, 82–87
capture risk-aversion, 74
moral hazard, 75
Static tax rates
NDTS
depreciation and investment tax credits, 141–142
EBITDA, 141
using profitability, 142
variable, 142
statutory tax rates, 143
corporate tax results, 143
Stock appreciation rights (SAR), 264–265
Stock markets, 768
Stock option explosion, 274
See also CEO pay
Clinton $1 million Deductibility Cap, 276–277
compensation expense deduction, 278–279
IRS Section 162(m), 278–279
performance-based compensation, 277–278
FASB, 279–280
accounting treatment of options, 281
Corporate Pay Responsibility Act, 280
FAS 123 rule, 281
proposal, 280
repricing activities, 282
fueled factors, 274–275
median grant-date compensation for CEOs, 275
1972 APB Opinion 25, 279
fixed accounting, 281–282
NYSE listing requirements, 284–285
backlash against explosion, 288
broad-based option grants, 287–288
broad-based plan, 285
employee stock options, grant-date number of, 286
employee stock options, grant-date values of, 286–287
facing barrage of criticism, 285
SEC Holding Period Rules, 276–277
SEC Option Disclosure Rules, 282
grant-date Black–Scholes cost, 283
Grant-Date Pay for CEOs, 283–284
non-equity compensation, 283
quantifying option, 282–283
shareholder pressure for equity-based pay, 276
Structured investment vehicle (SIV), 12
Substitute mechanisms, 443
Supermajority rules, 268
Supplemental executive retirement plan (SERP), 294
Supplementary Financing Program (SFP), 58
Survey of Consumer Finances (SCF), 580
T
T-bonds, 154–155
Takeover Rule, 672–673
Target bonus, 244
Tax hypothesis, 141
Tax Reform Act of 1986 (TRA86), 177
Tax shelters, 196
evidence, 197
high-basis low-value variety, 196–197
MIPS, 197
nonshelter peers, 197
traditional explanations, 197
Taxes, 124–125
avenues, 126
capital markets, 125
and capital structure, 126–163
and compensation policy, 189–193
corporate and personal income tax rates, 125
corporate financial policies, 126
multinational tax issues, 126–133
shelters, 196–197
Taxes and payout policy
See also Compensation policy; Corporate decisions
corporate payout policy changes
individual investor taxable accounts, 183
institutional investors, 184
investor-level payout tax rates, 182–183
non-tax conditions, 183–184
stock options, 183
ex-day stock returns
dividend clienteles, 184–186
ex-day premia and returns, 186–189
firm value affected by dividend payments, 181–182
theory and empirical predictions
dividend clienteles, 180
dividends, 180
dynamic clienteles, 181
ex-day premium, 181
financial executives’ statements, 180
firm value, 180
nontax factors, 180
null hypotheses, 180
payout effects, 181
using prediction, 181
TBTF. See Too Big To Fail
Term Securities Lending Facility (TSLF), 56–57
Term sheets. See Venture capital (VC)—contracts
TFP. See Total factor productivity
Thomson Reuters, SIFMA, 60–61
ThomsonOne, 577
Time-series tax effects, 147–148
Too Big To Fail (TBTF), 323–324
Total compensation, 224–225
See also Executive compensation
components, 220–221
cost vs. incentive compensation value, 228–233
SEC, 220
Total factor productivity (TFP), 632
Total Option Vega, 239–240
Townsend’s costly state verification model, 75
TRA86. See Tax Reform Act of 1986
Trade credit, 782–785
Trade-off models, 141
Traditional bank business model, 26
Traditional financial system, 760
Tranches, 2, 7, 40
equity, 49
TSLF. See Term Securities Lending Facility
Tunneling, 438–439
Two-stage least squares (2SLS), 513
U
Untaxed investor, 196–197
US Bond Market Association. See Securities Industry and Financial Markets Association
US pay premium, 313– 314
US tax system, 126–127
See also Taxes and payout policy
corporate taxes affect debt vs. equity policy
corporate tax status endogeneity, 145–147
dynamically simulated marginal tax rates, 143–145
tax effects, economic importance of, 148–150
static tax rates, 141–143
time-series and small-firm evidence, 147–148
trade-off models, 141
debt increases firm value tax advantage, 133
average unexploited tax benefits, 137–139
cross-sectional regression analysis, 140
cross-sectional regressions, 135–136
exchange offers, 133–135
using financial statement data, 139–140
full statutory tax rate, 137
marginal tax benefit functions, 136
mean benefits annual calculations, 138
using simulation methods, 136
beyond debt vs. equity
AMT system, 158
DB, 160
debt maturity structure, 161–163
high-tax-rate firms, 160
using income before debt interest, 159
low-tax-rate firms, 158–159
pension reversions, 160–161
pensions, 160
prediction, 159–160
using relatively many capital leases, 159
personal taxes affect corporate debt vs. equity policy
market-based evidence, 153–158
Miller equilibrium, 150
theory and empirical predictions
after-personal-tax value, 127
corporate and individual taxation, 127
debt financing expression, 128
equilibrium expression, 132
equilibrium supply and demand curves, 131
high-tax-rate firms, 132
implications, 130–131
NDTS, 132
null hypotheses, 128
personal and corporate taxes, 130
personal taxes, 131
predictions, 130, 132
PV term expression, 127–128
using state-preference framework, 129
V
Value-adding services, 595
using Bayesian methods, 596
CEO, 596
difficult-to-observe processes, 597
using hand-collected dataset, 595–596
high-reputation VCs, 596–597
using survey-based evidence, 596
VC. See Venture capital
VC investments. See Venture capital investments
VC research survey. See Venture capital research survey
VCExperts, 579
Vega Elasticity, 239–240
Venture capital (VC), 574
and angel financing, 587
contracts, 589–590
empirical evidence, 592–595
investments staging, 597–599
and economy, 631
concerning empirical research, 588
entrepreneurs, 586
entry, employment, and growth role, 633–634
company-level studies, 634
difference-of-difference approach, 634
positive relationship, 634
external funding, 588
financing, 586
monitoring capabilities, 586–587
public policy for venture capital
complementarity, 636
econometric challenges, 635
establishing and regulating stock markets, 635
innovation, 634–635
labor market rigidities, 635–636
public pension funds, 635
regional innovation and entrepreneurship, 636
SBIR program, 636
regression discontinuity approach, 587
returns, 576
trade-offs, 588
VC-backed companies, 587–588
venture-backed companies contribution
commercialization, 633
using German start-ups database, 633
prudent man rule, 631–632
relationship, 632–633
TFP, 632
Venture capital deal syndication, 614
screening process, 614–615
syndication and performance relationship, 615
VC partner choices, clustering in, 615–616
Venture capital firms’ analysis
general and limited partners relationship, 617
contractual and reputational issues, 619
data, 618–619
fund managers, 618
using past performance, 618
VC funds, 619
VC partnership contracts, 617–618
investment strategies, 612
cross-border investments, 613–614
portfolio size and scope, 612–613
organizational structure, 604
BVC firms, 608–609
CVC, 604–608
government-sponsored, 609–610
internal organization, 610–612
relationships among, 614
social networks among, 616
venture capital deal syndication, 614–616
venture capital firm reputation, 616–617
Venture capital investments (VC investments), 575, 583, 726–727
contracting
contingent control structure, 591
continuous time moral hazard model, 591
CPE, 589–590
double moral hazard model, 590
empirical evidence on VC contracts, 592–593
ex-post bargaining game, 592
executives in VC-backed companies, 593–594
higher ability investors, 593
non-contractible value-adding advice, 590
using non-standard definition, 592
optimal cash flow and control rights theories, 589–590
optimal contract, 591
risk sources, 593
terminating vs. refinancing venture, 590–591
US contracts, 594
variety of modeling assumptions, 592
venture debt, 595
exits, 599
angel financing matters, 603–604
causal effects, 601
exit performance determinations, 599
favorable analyst revisions, 602
investor reputation, 600
investor’s exit preferences, 600
IPO process, 601
non-VC control group, 599
post-IPO performance, 603
price performance, 603
private information, 603
relationships and networks, 600
ThomsonOne and VentureSource, 601
VC-backed companies, 599–602
venture capitalist, 602
financial returns, 619
data and methodological challenges, 620
data availability and reporting biases, 621–622
ex-post measure, 626–627
fund characteristics, 627
gross returns, 629–630
gross vs. net returns, 620–621
limited partners returns, differences in, 628–629
LPs, 627–628
net returns, 623–625
private equity investment returns, 630–631
return estimation, 623
returns and size effects persistence, 626
returns measure, 622–623
risk and illiquidity, 625–626
size/performance relationship, 627
investment choices
choice among venture capital firms, 588–589
deal flow sources, 583–584
concerning empirical research, 588
entrepreneurs, 586
external funding, 588
financing, 586
legal rules, 584
management literature, 585
monitoring capabilities, 586–587
regression discontinuity approach, 587
self-fulfilling prophecy, 585
serial entrepreneurs, 584–585
trade-offs, 588
VC and angel financing, 587
VC-backed companies, 587–588
post-investment
using Bayesian methods, 596
CEO, 596
difficult-to-observe processes, 597
using hand-collected dataset, 595–596
high-reputation VCs, 596–597
using survey-based evidence, 596
value-adding services, 595
staging, 597– 598
CVC’s core, 604–605
methodological challenges, 599
non-traded assets, 625
upfront financing, 597–598
Venture capital research survey (VC research survey), 574
census databases, 579–580
commercial databases
ThomsonOne and VentureSource, 577–578
VentureXpert and VentureOne, 577
data sources and methodology, 577
databases, 580
economic issues, 576
empirical estimation challenges, 582–583
hand-collected survey data, 578
CorpTech, 578
cross-check hand-collected data, 578
Kauffmann firm survey, 578
NVCA and EVCA, 580
preqin, 580
proprietary industry data, 579
sample choice
geographic scope, 581
Kauffman survey, 582
non-institutional finance, 581
sample approaches and observation units, 580–581
substantial economic activities, 581–582
SCF, 580
VC literature, 576
VC markets structure, 575–576
Venture capitalist, 602
VentureOne, 577
VentureSource, 577
VentureXpert, 577
W
W-2 compensation, 269
WBES. See World Business Environment Survey
Wealth-performance elasticity, 236–237
Workplace Employee Stock Option Act, 343
World Business Environment Survey (WBES), 720, 727–728
Worldwide Total Remuneration (WWTR), 318
X
Xerox, 288
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