Company Stock

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SOCIAL SCIENCE RESEARCH NETWORK

EMPLOYEE BENEFITS, COMPENSATION & PENSION LAW ABSTRACTS
Sponsored by Pension Governance, LLC
Vol. 8, No. 21: June 8, 2007

Editor: PAMELA J. PERUN
Policy Director, Aspen Institute - Initiative on
Financial Security
PAMELA@PLANETNOW.COM
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Topic of This Issue:
Company Stock
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T A B L E O F C O N T E N T S

"Employee Share Ownership in Australia: Theory, Evidence, Current
Practice and Regulation"
INGRID LANDAU
University of Melbourne - Faculty of Law
RICHARD MITCHELL
University of Melbourne - Faculty of Law
ANN O'CONNELL
University of Melbourne - Faculty of Law
IAN RAMSAY
University of Melbourne - Faculty of Law

"Give Me Equity or Give Me Death - The Role of Competition and
Compensation in Building Silicon Valley"
RICHARD A. BOOTH
University of Maryland School of Law

"One Share, One Vote: The Empirical Evidence"
RENEE B. ADAMS
University of Queensland Business School, European
Corporate Governance Institute (ECGI)
DANIEL FERREIRA
London School of Economics & Political Science (LSE) -
Department of Management, European Corporate Governance
Institute (ECGI), Centre for Economic Policy Research
(CEPR)

"The NUA Benefit and Optimal Investment in Company Stock in
401(K) Accounts"
MUKESH BAJAJ
LECG, LLC, University of California, Berkeley - Haas
School of Business
SUMON C. MAZUMDAR
Law and Economics Consulting Group (LECG), LLC,
University of California, Berkeley - Haas School of
Business
VIKRAM K. NANDA
Arizona State University - Finance Department
RAHUL SURANA
Law and Economics Consulting Group (LECG), Inc.

"Better Firm Performance with Employees on the Board? Not in the
Long Run"
R. ØYSTEIN STRØM
Ostfold University College

"Stock Options and Chief Executive Officer Compensation"
CHRIS ARMSTRONG
Stanford Graduate School of Business
DAVID F. LARCKER
Stanford University
CHE-LIN SU
CMS-EMS, Kellogg School of Management, Northwestern
University
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"Employee Share Ownership in Australia: Theory, Evidence, Current
Practice and Regulation"

Author: INGRID LANDAU
University of Melbourne - Faculty of Law
Email: imlandau@unimelb.edu.au
Auth-Page: http://ssrn.com/author=646959

Co-Author: RICHARD MITCHELL
University of Melbourne - Faculty of Law
Email: r.mitchell@unimelb.edu.au
Auth-Page: http://ssrn.com/author=232660

Co-Author: ANN O'CONNELL
University of Melbourne - Faculty of Law
Email: a.oconnell@unimelb.edu.au
Auth-Page: http://ssrn.com/author=94098

Contact: IAN RAMSAY
University of Melbourne - Faculty of Law
Email: i.ramsay@unimelb.edu.au
Auth-Page: http://ssrn.com/author=178811

Full Text: http://ssrn.com/abstract=989454

ABSTRACT: Since at least the 1970s, employee share ownership has
enjoyed bipartisan political support in Australia. Despite broad
and sustained public policy interest in employee share ownership,
however, Australian literature on the subject remains scarce.
There has also been very little in the way of comprehensive
analysis of the regulatory framework. This paper provides an
overview of employee share ownership from an Australian
perspective. It begins by reviewing the literature on broad-based
employee share ownership before turning to examine available data
on Australian practice. It then considers how employee share
ownership plans are currently provided for in public policy and
law. Companies in Australia proposing to offer shares to
employees must comply with many regulatory requirements. The
paper examines these requirements. The authors also examine
features of the current regulatory framework which have been
identified as problematic.
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"Give Me Equity or Give Me Death - The Role of Competition and
Compensation in Building Silicon Valley"
University of Maryland Legal Studies Research Paper No.
2006-44

Contact: RICHARD A. BOOTH
University of Maryland School of Law
Email: rbooth@law.umaryland.edu
Auth-Page: http://ssrn.com/author=50287

Full Text: http://ssrn.com/abstract=940022

ABSTRACT: In this essay, I argue that the preeminence of Silicon
Valley as an incubator of technology companies is attributable to
equity compensation. Ronald Gilson, relying on the work of
AnnaLee Saxenian and others who have noted the tendency of
Silicon Valley employees to job hop, has suggested that
California law prohibiting the enforcement of non-compete
agreements was a major factor in the rise of Silicon Valley (and
the demise of Route 128). I extend this line of thought by
suggesting that California employers may have relied on equity
compensation as a substitute way to bind employees. I argue
further that equity compensation (in its many forms) is a
superior way to assure the loyalty of employees. First, equity
compensation induces employees to focus on how their efforts will
contribute to the success of the business. Second, equity
compensation saves cash for the startup firm and permits firms to
compete for talent without offering more cash. Third, equity
compensation forces the company to seek and plan for liquidity.
Fourth, equity compensation induces employees to consider the
prospects of the employer firm and thus induces employer firms to
consider the ideas of employees. In addition, equity compensation
may induce employees to exit unpromising ventures sooner rather
than later thus allocating resources more efficiently. Fifth,
equity compensation induces firms to maintain an efficient size.
If a firm grows too large, too diversified, or too unfocused,
equity compensation will become less attractive for employees.
Thus, equity compensation will tend to induce spin-offs and other
divisive transactions. Finally, equity compensation may be an
efficient substitute for more intrusive forms of dispute
resolution such as fiduciary duty. Employees will be less tempted
to cut and run if they must give up bird-in-hand equity.
Moreover, equity compensation is more fine-tuned than non-compete
agreements. Whereas most non-compete agreements have a specified
duration, equity compensation will effectively bind an employee
only as long as necessary to assure the success of the venture.
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"One Share, One Vote: The Empirical Evidence"
ECGI - Finance Working Paper No. 177/2007

Contact: RENEE B. ADAMS
University of Queensland Business School, European
Corporate Governance Institute (ECGI)
Email: r.adams@business.uq.edu.au
Auth-Page: http://ssrn.com/author=248065

Co-Author: DANIEL FERREIRA
London School of Economics & Political Science
(LSE) - Department of Management, European
Corporate Governance Institute (ECGI), Centre for
Economic Policy Research (CEPR)
Email: d.ferreira@lse.ac.uk
Auth-Page: http://ssrn.com/author=327077

Full Text: http://ssrn.com/abstract=987488

ABSTRACT: We survey the empirical economic literature on
disproportional ownership, i.e. the use of mechanisms that
separate voting rights from cash flow rights in corporations. Our
focus is both on explicit mechanisms that allow some shareholders
to acquire control with less than proportional economic interest
in the firm (dual class equity structures, stock pyramids,
cross-ownership, etc.) and on implicit ways of creating a wedge
between voting and cash flow rights (dispersed share ownership,
ESOPs, fiduciary voting, etc.). We provide a broad overview of
different areas in this literature and highlight problems of
interpretation that may arise because of empirical difficulties.
While the literature has provided many important insights into
the causes and consequences of disproportional ownership, we
argue that it has not yet provided a satisfactory answer to the
question of whether disproportional ownership creates social
costs by destroying firm value. This is partly due to measurement
problems and the treatment of endogeneity, and partly because
empirical findings using different samples and methods are often
in conflict with each other. We outline potentially promising
areas for future research.
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"The NUA Benefit and Optimal Investment in Company Stock in
401(K) Accounts"

Author: MUKESH BAJAJ
LECG, LLC, University of California, Berkeley -
Haas School of Business
Email: mukesh_bajaj@lecg.com
Auth-Page: http://ssrn.com/author=17309

Co-Author: SUMON C. MAZUMDAR
Law and Economics Consulting Group (LECG), LLC,
University of California, Berkeley - Haas School of
Business
Email: SUMON_MAZUMDAR@LECG.COM
Auth-Page: http://ssrn.com/author=67152

Co-Author: VIKRAM K. NANDA
Arizona State University - Finance Department
Email: vikram.nanda@asu.edu
Auth-Page: http://ssrn.com/author=17302

Contact: RAHUL SURANA
Law and Economics Consulting Group (LECG), Inc.
Email: rsurana@lecg.com
Auth-Page: http://ssrn.com/author=436179

Full Text: http://ssrn.com/abstract=965808

ABSTRACT: It is widely believed that contrary to standard asset
allocation theory, employees irrationally hold concentrated
investments in company stock in their 401(k) plans thus bearing
firm-specific risk that could otherwise have been diversified
away [See for example, Benartzi (2001)]. However, in measuring
any such lack of diversification costs, a unique tax benefit
associated with such investments (available to those who choose
the Net Unrealized Appreciation [NUA] strategy) has been hitherto
ignored. We analyze an employee's optimal allocation of
retirement assets among alternative investments, including
company stock, in the presence of the NUA tax benefit. The
employee has a standard power utility function and seeks to
maximize expected utility from her after-tax wealth upon
retirement. Based on simulations, we find that, even when company
stock is stochastically dominated by investments in the market
index, the employee will allocate a non-trivial part of her
retirement funds to company stock for a wide range of parameter
values. Consistent with empirical evidence, the allocation to
company stock is greater for employees closer to retirement and
when the company's stock has experienced substantial gain in
value.
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"Better Firm Performance with Employees on the Board? Not in the
Long Run"

Contact: R. ØYSTEIN STRØM
Ostfold University College
Email: r-oeystr@online.no
Auth-Page: http://ssrn.com/author=94470

Full Text: http://ssrn.com/abstract=967445

ABSTRACT: The employee stakeholders have a lawful right to board
representation in Norway. In this paper, I explore the direct and
indirect effects of employee directors upon firm performance in a
panel of all non-financial Norwegian listed firms from 1989 to
2002 using the fixed effect estimation methodology. I set up a
simultaneous equation estimation model with a board index
constructed from board characteristics and the leverage as
governance mechanisms, using lagged firm performance, employee
directors, firm size, and firm risk as exogenous variables. The
model tests include the overall sample and sub-samples of
co-determined and shareholder determined firms, and in robustness
tests the stock return and the accounting return on assets
replace Tobin's Q, and the dividend payout rate in place of the
leverage. The negative employee director association with firm
performance comes out very clearly. Reverse causation running
from the lagged firm performance to the board index is confirmed,
while shareholders' compensatory actions to neutralise the
employee director influence, is clearly visible. Overall, the
paper rejects beneficial effects of one group of stakeholders,
the employees, on company boards.
______________________________

"Stock Options and Chief Executive Officer Compensation"

Author: CHRIS ARMSTRONG
Stanford Graduate School of Business
Email: carmstro@stanford.edu
Auth-Page: http://ssrn.com/author=426203

Contact: DAVID F. LARCKER
Stanford University
Email: Larcker_David@gsb.stanford.edu
Auth-Page: http://ssrn.com/author=49762

Co-Author: CHE-LIN SU
CMS-EMS, Kellogg School of Management, Northwestern
University
Email: c-su@kellogg.northwestern.edu
Auth-Page: http://ssrn.com/author=816866

Full Text: http://ssrn.com/abstract=987693

ABSTRACT: Although stock options are commonly observed in chief
executive officer (CEO) compensation contracts, there is
theoretical controversy about whether stock options are part of
the optimal contract. Using a sample of Fortune 500 companies, we
solve an agency model calibrated to the company-specific data and
we find that stock options are almost always part of the optimal
contract. This result is robust to alternative assumptions about
the level of CEO risk-aversion and the disutility associated with
their effort. In a supplementary analysis, we solve for the
optimal contract when there are no restrictions on the contract
space. We find that the optimal contract (which is characterized
as a state-contingent payoff to the CEO) typically has
option-like features over the most probable range of outcomes.