Yaniv Grinstein

Assistant Professor of Finance

Work In Progress

CEO Pools (with Martijn Cremers)

Much of the executive compensation literature treats CEOs as a homogenous group with similar skill sets. We argue that this treatment overlooks fundamental differences in the abilities, skills, and talents that CEOs in different industries are required to have. In a competitive equilibrium, these differences should shape the demand and supply for different CEOs in different industries and consequently, the equilibrium compensation. To better understand the market forces that shape CEO compensation, we need first to understand what pools of candidates firms choose from.

Our first step is to identify the pools or markets for CEO talent across different industries. Toward that end, we collected information from about 2,000 CEO replacements in S&P 1500 companies between the years 1993 and 2005. For each new CEO, we identify her position before becoming a CEO, the firm from which that CEO arrives and the industry that that firm belongs to. From these revealed choices of firms, we draw inferences regarding both the pools from which CEOs in different industries are drawn and the pools to which managers in different industries go to.

We find large variations in the pools from which CEOs in different industries are drawn For example, firms that belong to the petroleum-refinery industry never hire CEOs from outside their industry. In fact, all sixteen new CEOs in this industry between 1993 and 2006 are insiders - with previous lower-level management positions within their own firms. In contrast, CEOs of business-service companies (mostly software-services) come from as many as fifteen different 2-digit SIC industries. Similarly, we find large differences in the pools that managers in different industries go to.

Next, we study whether cross-sectional variation in compensation across firms can be explained by market shocks within the pools. We contrast these shocks with shocks outside the pool to determine the extent to which executive compensation is shaped by supply and demand for CEO talent.

Product Market Competition and Corporate Governance (with Gustavo Grullon and Roni Michaely)

We study the effect of product market competition on alignment of insiders’ incentives. We use two measures of product market competition: the 4 digit SIC codes’ Hirfendhal index, and the amount of import from foreign countries at the 4 digit SIC level. We then study the relation corporate governance mechanisms within industries and their level of competition. We form several tests. First, we study whether industries in which there is fiercer product market competition require in equilibrium fewer corporate governance mechanisms to overcome agency conflicts. Second, we use the methodology of Chhachharia and Grinstein (2007) to explore the announcement effect of the Sarbanes Oxley law between complying and non-complying firms across competitive and non-competitive industries. To the extent that product market competition substitutes for internal governance mechanisms, non-complying firms in competitive industries should observe a lower announcement effect than non-complying firms in non-competitive industries.

Separating the CEO from the Chairman Position (with Yearim Valles).

We study the determinants of the decision to separate the chairman from the CEO position and the changes in these decisions between 2000 and 2004. on a sample of about 1000 firms in the year 2000. We find that CEO and owners characteristics are the main determinants of whether firms are separating these two positions. Firms are more likely to separate these two positions when the tenure of the CEO is lower, when there is a higher ownership by non CEO members, and when there is a lower fraction of independent directors on the board. Moreover, a non-CEO chairman is almost always an insider or a linked director. These results are consistent with previous studies which show that the decision to separate is consistent with the “passing the batton” argument. We also compare the decision to separate the two positions across small and large firms. Small firms are more likely to separate the two positions than large firms. In small firms, lower CEO ownership, CEO tenure, and board ownership are the main drivers of the decision to separate the two positions. In contrast, in large firms the complexity of the tasks (as proxied by Q ratio or R&D) also determine the decision, suggesting that the costs and benefits of coordination also play a role in the decision in large firms. Finally, we document a time trend in the decision to separate the chairman from the CEO positions. Comparing firms in 2000 with firms in 2004, we find that there is an increase in the separation from 26% to 31%. More interestingly, the characteristics of the chairmen differ. Among S&P 500 firms, there is a significant increase in the percentage of non-CEOs chairman that are independent directors.

Executive Loans, Corporate Governance, and Firm Value: Evidence from Banks (with Ajay Palvia).

We explore the practice of extending loans to executives in a sample of about 10,000 U.S. commercial banks between 1994 and 2004. The aggregate amount of loans to executives in the sample exceeds $14 billion, with more than two thirds of the banks extending loans to their executives in any given year. We find that the likelihood of extending a loan is higher and the size of the loan is larger in banks with weaker governance structures. We also find that the predicted component of the loan arising from the firms’ weak governance characteristics has a statistically significant negative relationship with subsequent bank operating performance. Our evidence is consistent with the argument that agency conflicts are a driver of executive loans.

Are Perks an Excess? Evidence from the new compensation disclosure rules. (with Nir Yehuda and David Weinbaum).

Perks have a very important role in agency theory. Grossman and Hart (1980), Jensen and Meckling (1976), and Jensen (1986), among others, all point to perks as the driver for conflicts of interest between managers and investors. In general, perks are diversions of corporate resources for the benefits of corporate managers at the expense of investors. Perks can take many different forms, such as exuberant retirement packages, excessive compensation arrangements, corporate jets, lavish offices, etc.

Whether perks are indeed a sign of excess and misuse of corporate resources has been recently a topic of debate. A recent article by Rajan and Wulf (2006), argues that, in general, perks to managers are not a sign of excess, but a substitute for compensation arrangement. In a world with frictions, perks can be a superior way to compensate managers because of tax considerations, transaction costs, positive externalities to the firm etc. In contrast, Yermack (2006), who focuses only on the use of corporate jets in corporations, argues that these are in general a sign of an agency conflict and an excess.

In this article we wish to shed further light on the role of perks in executive compensation. In December of 2006, the Securities and Exchange Commission came up with new disclosure requirements from corporate insiders. In particular, it required a comprehensive and enhanced disclosure of perks to executives.

Using a sample of 400 small and large public U.S. firms we:

1. Document the extent of corporate use of perks in small and large firms. Unlike Rajan and Wulf, we document the cost of these perks to investors and we do not rely on the potentially biased survey. Unlike Yermack, we focus on all types of disclosed perks.
2. We study the extent to which the rules have increased the disclosed amounts of the perks. We study the impact of these increases on shareholders looking at the announcement effect of these perks on shareholder value.
3. We study the determinants in perks. In particular whether they are associated with the free cash flow problem and with higher CEO entrenchment.