ASU, Utah finance professors publish research on incentive contracts

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Collaborative research by finance professors at Arizona State University, the University of Utah and the University of Kansas on the link between managerial ownership and corporate performance has just been published in the Journal of Financial Economics.

Jeffrey Coles, ASU professor of finance, has published “Structural Models and Endogeneity in Corporate Finance:  The Link between Managerial Ownership and Corporate Performance” in the Journal of Financial Economics, January 2012. His co-authors are Michael Lemmon of Utah and Felix Meschke of Kansas.

“There has been a long and inconclusive theoretical debate and empirical analysis of: 1) the connection between the form of executive compensation contracts and firm performance; and 2) the determinants of optimal managerial contract design,” says Coles. “The debate has been front and center recently, the reason in part being the perception that poorly structured incentive contracts played a central role in the financial crisis. 

“How do executive compensation contracts align managerial interests with shareholder interests? How does that alignment affect firm performance? What are the characteristics of the firm’s product markets and cost structure that determine best contract design? Our paper addresses these questions.

“The reason we are successful in providing answers is that we develop a structural, quantitative model of the firm.  Important determinants of executive contract design include the marginal productivity of managerial human capital, the productivity of physical capital, riskiness of firm cash flows and margin in the product market.”

Coles, who is the Francis J. and Mary B. Labriola Endowed Chair in Competitive Business at ASU, is a former faculty member at Utah. Lemmon received his doctorate from ASU.  

Written by Sarah Auffret