Bankers, markets investors

Bankers,
markets
investors
n° 112
May-June 2011
ISSN 2101-9304
150 euros
revue-banque.fr
an academic and professional review
art i c l es
5
CEO Compensation and Managerial Performance:
an Analysis of US Non-Financial Firms
Laurent Weill, EM Strasbourg Business School, Université de Strasbourg
16
Calendar Spreads in Commodity Futures Markets, Risk Premium
and the Convenience Yield
Sami Attaoui and Pierre Six, Rouen Business School
Constantin Mellios, PRISM, Université Paris 1 Panthéon-Sorbonne
34
Hedge Fund Returns and Factor Models: A Cross Section Approach
Serge Darolles, Université Paris 7, LYXOR AM, CREST-INSEE
Gulten Mero, Université d’Evry, CREST-INSEE, EPEE
F o c u s on. . .
54
BA New Classification of Exotic Options
Jian Wu, Rouen Business School
Wei Yu, BNP Paribas
Tho Nguyen, State Bank of Vietnam
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Bankers, Markets & Investors n° 112 may-june 2011
© Bankers, Markets & Investors
Hervé ALEXANDRE/Université Paris-Dauphine, Lorenzo BERGOMI/SG CIB, Bruno-Rolland BERNARD/LVMH, Éric de BODT/ESA Lille, Hubert de la BRUSLERIE/Université Paris I,
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OSTL Lille 1, Jacques SIKORAV/BNP Paribas, Grégory TAILLARD/Sinopia AM.
Abstracts
■■ CEO Compensation and Managerial
■■ Hedge Fund Returns
Performance: An Analysis of
US Non-Financial Firms
and Factor Models:
A Cross Section Approach
5
Laurent Weill, EM Strasbourg Business School, Université de Strasbourg
Serge Darolles, Université Paris 7, LYXOR AM, CREST-INSEE
This paper conducts an analysis of the relationship between CEO compensation and managerial performance on a large sample of US public firms,
by taking into account the different components of CEO compensation. We
estimate a stochastic frontier model in which managerial performance is
related to compensation components. We find a positive influence of CEO
compensation on managerial performance, with a differentiated impact
for components of compensation. We show that increases in salary, bonus, and options grants tend to enhance managerial performance. Our
findings tend therefore to support the view that compensation contracts
can be designed to increase managerial performance.
Gulten Mero, Université d’Evry, CREST-INSEE, EPEE
■■ Calendar spreads in commodity
futures markets, risk premium
and the convenience yield
16
Sami Attaoui and Pierre Six, Rouen Business School
Constantin Mellios, PRISM, Université Paris 1 Panthéon-Sorbonne
This paper studies calendar spreads in commodity futures markets while
taking into account a stochastic convenience yield. We show that a convenience yield imperfectly correlated with the spot commmodity price results
in an optimal strategy composed of two commodity futures contracts.
These strategies reveal a calendar spread effect through the positive correlation between the two futures contracts. These strategies can easily be
computed and analyzed under the Samuelson hypothesis.
34
This paper develops a dynamic approach for assessing hedge fund risk
exposures. First, we focus on an approximate factor model framework
to deal with the factor selection issue. Instead of keeping the number of
factors unchanged, we apply Bai and Ng (2002) and Bai and Ng (2006) to
select the appropriate factors at each date. Second, we take into account
the instability of asset risk profile by using rolling period analysis in order
to estimate hedge fund risk exposures. Individual fund returns instead
of index returns are employed in the empirical application to better understand the covariation structure of the data: the common behavior of
hedge fund returns is filtered not only from the past historical data (time-series dimension), but also from the cross-section of returns. Finally,
we apply our approach to equity hedge funds and replicate the returns
of the aggregated index.
■ ■f o c u s o n …
BA New Classification
of Exotic Options
54
Jian Wu, Rouen Business School
Wei Yu, BNP Paribas
Tho Nguyen, State Bank of Vietnam
Tailor-made to fit investors’ specific needs, exotic options are more efficient than traditional ones to the extent that they allow a better risk
reallocation between economic agents. However, due to the increasing
complexity of exotic options, it is necessary to have a well specified classification structure for these products for better use and control. This
article proposes a new approach to classify and design exotic options.
Using traditional option characteristics as benchmark, options are classified according to their associated degrees of exoticism, which depend on
the violation of any combinations of 5 traditional option characteristics.
Accordingly, options are classified in the same group if they do not meet
the same traditional conditions. In our methodology, 64 most frequently
traded exotic options can be classified and 26 new exotic options can be
created. This would help regulators and small investors to have a better
understanding on complicated exotic options, so that they can assess
precisely the riskiness related to these products.
bankers, markets & investors n° 112 may-june 2011
3
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CEO Compensation
and Managerial Performance:
AN ANALYSIS OF US NON-FINANCIAL FIRMS
C
LAURENT
WEILL*
EM Strasbourg
Business
School,
Université
de Strasbourg
EO compensation has received a great deal of
attention from the public in recent years owing to
the strong increase of CEO pay and the widespread
use of stock options. Both of these issues are intertwined
as the remarkable increase of CEO compensation is due
to the emergence of stock options associated with greater
other components of compensation. This evolution has
contributed to favor a common view according to which
CEOs would be overpaid. It might indeed be the case that
greater CEO compensation, by increasing inequality,
hampers welfare, given that most people are reluctant
to accept inequality. However in order to know if CEOs
are overpaid, an investigation from the firm perspective
is needed to check whether increased CEO compensation
is beneficial for companies in the sense that ultimate
benefits exceed costs of CEO compensation. It is indeed of
utmost interest to check whether economic justifications
exist for high levels of CEO compensation. This leads to
the issue of the existence of a positive link between CEO
compensation and firm performance.
Theoretical literature has largely investigated this issue
by focusing on agency conflicts between managers and
shareholders. It however provides conflicting predictions
on the sign of the relationship between CEO compensation and firm performance, which leads to the need for
evidence on this issue. The empirical literature is however not very helpful on this topic, as most papers focus
on the opposite link according to which greater performance should favor greater compensation, as surveyed
by Murphy (1999). An exception is Habib and Ljungqvist
(2005), but it does not directly estimate managerial performance and restricts the analysis to stock components
of compensation.
The aim of our paper is therefore to provide new evidence on the impact of CEO compensation on managerial
performance. Our contribution is based on two major
additions to this literature. The first addition is the use
of frontier efficiency techniques to estimate managerial
performance. These techniques provide sophisticated
* [email protected]
measures of managerial performance: the efficiency scores. A production frontier is estimated which allows the
comparison of each firm to the best-practice companies.
We therefore use a measure of productive performance
rather than a measure of financial or stock performance,
as it is commonly used in studies focusing on agency
theory. This measure of productive performance provides
a relevant assessment of managerial performance, as it
is not influenced by investors’ expectations, like stock
performance measures, or market power of firms, like
financial performance measures. Our measure of productive performance is connected to agency theory, as
this literature investigates the agency conflicts between
agents (managers, shareholders, creditors) which exert
a direct impact on the productive performance. Indeed
agency costs resulting from the conflicts of interest
between managers and shareholders can notably favor
the moral hazard behavior of managers that can waste
firm resources of minimize effort, rather than maximizing productive performance, as they have their own
objectives. Our study therefore prolongs many works
using frontier efficiency techniques to analyze the consequences of agency problems (Lauterbach and Vaninsky,
1999, and Weill, 2003, for studies on firms, and Pi and
Timme, 1993, for the pioneering paper on this topic in
the banking industry).
The second addition is the use of an extensive dataset, which contains information on all components of
executive compensation on a large panel of US public
firms. This dataset allows investigating the differentiated
impact on managerial performance of each component
of compensation, meaning mainly salary, annual bonus,
option grants and stocks grants, and changes in the value
of stock-options.
As a consequence, our paper answers two fundamental
questions for the understanding of the incentives connected
with CEO compensation: is greater CEO compensation
associated with greater managerial performance? Have
all components of compensation the same impact on
managerial performance?
Both questions are of utmost interest owing to their
normative implications for corporate governance. A
Bankers, Markets & Investors nº 112 may-june 2011
Weill.indd Sec1:1
5
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