SEMINAR ADVANCED CORPORATE FINANCE: CORPORATE GOVERNANCE

Discussion Points
Name: Session: 1

Paper: Bertrand et al. (2001)

RESEARCH QUESTION (ONE SENTENCE)

Are CEOs rewarded for luck and why?

CONTRIBUTION TO THE LITERATURE / LINK TO OTHER PAPERS IN SESSION (TWO SENTENCES)

Contribution: the authors questioned the efficacy of agency-centric models in explaning CEO
compensation patterns and discovered that manageres were, in fact, being rewarded for luckly
outcomes, using three distinct instrumnetal variables to account for luck.

Link: In this session, each paper analyses different aspects of executive compensation structures. Like
Bertrand et al. (2001), the study by Abudy et al. (2020) also reveals that contracts can be set in a way
that does not optimize firm value. Both studies focused on rent extraction theories, and their findings
align on the fact that these phenomena are more pronounced in firms with weaker corporate
governance.

LIMITATIONS (AT MOST THREE BULLET POINTS, ONE SENTENCE EACH)

1. For the first measure of luck (oil price) they rely on industry-specific data spanning relatively a
brief period from 1977 to1994, and when they extend these findings to other industries ( using
exchange rate movements and mean industry performance as measures of luck) the study
relies on a significantly constrained dataset covering only the period from 1984 to 1991.
2. The paper mentions the skimming model but fails to provide an explanation or examination of
it. The authors also express frustration over the lack of formal models for this theory,
especially considering the abundance of models regarding the contracting view.
3.
A distinction is made regarding the composition of pay, using only total compensation and cash
compensation as dependent variables, without breaking down into other components such as
options, stocks or bonuses.
AVENUES FOR FUTURE RESEARCH (AT MOST THREE BULLET POINTS, ONE SENTENCE EACH)

1. Expand the dataset and extend the time frame to include markets outside the US and a recent
data.
2. It could be beneficial to decompose pay into its components to understand if there is a
correlation between the use of a specific instrument and the inclusion of compensation for luck.
3. The paper mentions an asymmetry between periods of good luck and periods of bad luck
(“CEOs are always rewarded for good luck, they may not always be punished for bad luck”). By
analyzing these periods separately, even more extreme results might be uncovered.