| Chapter 1 provides evidence that managers' views of fundamental firm value diverge systematically from market valuations, and that managers act on their perception of mispricing in their corporate decision making. An analysis of insider trading patterns shows that high book-to-market (“value”) firms are regarded as undervalued by their own managers relative to low book-to-market (“growth”) firms. Managers in value firms actively purchase additional equity on the open market despite substantial prior exposure to idiosyncratic return risk through stock and option holdings, equity-based compensation and firm-specific human capital. Further evidence links managers' private portfolio decisions directly to firm-wide changes in capital structure, suggesting that managers actively time the market both in their private trades and in firm-wide decisions.; Chapter 2 analyzes the link between equity-based compensation and created managerial incentives. It (1) derives a measure of incentives suitable for both linear and non-linear compensation contracts, (2) analyzes the effect of risk on incentives, and (3) clarifies the role of the manager's private trading decisions in incentive creation.; Chapter 3 is a clinical study of the employee stock offering during France Telecom's 1997 initial public offering. Using a database that tracks over 200,000 eligible participants, we analyze employees' decisions whether to participate; how much to invest; and what form of stock alternatives they selected. We report four anomalous findings: (1) The firm specificity of human capital has a negligible effect on employees' investment decisions; (2) the amount of funds invested in the stock plans seems driven by a different set of forces than the decision to participate, which we suspect reflects a “threshold effect” that we attempt to measure; (3) employees “left on the table” benefits equal to one to two month's salary by failing to participate; and (4) most potential participants underweighted the most valuable asset. |
