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FL-4: Careers and Compensation
CEO Marketability, Employment Opportunities, and Compensation: Evidence from Compensation Peer Citations
1University of Alabama; 2Auburn University
We provide evidence that the 2006 compensation peer group disclosure rule increased the transparency and efficiency of the executive labor market. Our analysis is based on the insight that the breadth with which a firm is cited as a compensation peer by other companies provides information about its executives’ outside opportunities. Executives at firms that are cited more frequently are more likely to leave their current firms or to receive compensation increases. Firms appear to increase the equity-based component of CEO compensation, in particular, which could be useful for retaining sought-after executives. We provide further evidence using a difference-in-differences framework that the greater transparency increased labor market mobility and put upward pressure on overall CEO compensation levels. This last result is noteworthy given that the intent of the rule was to ensure that firms do not abuse compensation benchmarking to justify higher executive compensation.
Career Risk and Market Discipline in Asset Management
1Indiana University; 2Università di Napoli Federico II
We analyze hand-collected data on the curricula of 1,627 individuals who worked in hedge funds at some point during their careers. We investigate the extent to which their careers are sensitive to funds' relative performance. They experience a significant acceleration of their career upon being hired by hedge funds, especially if these recently performed strongly relative to their benchmark. Such funds appear to target professionals educated in top schools, and keep overperforming after hiring. This evidence suggests that better funds are matched with more talented professionals. Conversely, the careers of top managers are significantly and permanently damaged by the liquidation of their funds. This "scarring effect" is concentrated in funds that underperform before liquidation, and thus appears related to the manager's reputational loss. Overall, our results reveal a new facet of market discipline in asset management, which operates via the managerial labor market.
The Effect of Superstar Firms on College Major Choice
1Chinese University of Hong Kong; 2London School of Economics; 3Hong Kong University of Science and Technology
We study the effect of superstar firms on an important human capital decision -- college students' choice of majors. Past salient, extreme events in an industry, as proxied by cross-sectional skewness in stock returns or in favorable news coverage, are associated with a disproportionately larger number of college students choosing to major in related fields, even after controlling for the average industry return. This tendency to follow the superstars, however, results in a temporary over-supply of human capital. Specifically, we provide evidence that the additional labor supply due to salient, extreme events lowers the average wage earned by entry-level employees when students enter the job market. At the same time, employment size and employee turnover stay roughly constant in related industries, consistent with the view that labor demand is relatively inelastic in the short run. In the longer term, firms cope with the supply increase by gradually expanding the number of positions that require prior experience.
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Conference: EFA 2017
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