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Executive Compensation in Firms Producing Addictive Goods
Název práce v češtině: Příjmy vrcholového managementu firem vyrábějících návykové zboží
Název v anglickém jazyce: Executive Compensation in Firms Producing Addictive Goods
Klíčová slova: 'hříšné' firmy, společenské normy, odměňování manažerů, dozorčí rady
Klíčová slova anglicky: sin firms, social norms, executive compensation, boards of directors
Akademický rok vypsání: 2012/2013
Typ práce: diplomová práce
Jazyk práce: angličtina
Ústav: Institut ekonomických studií (23-IES)
Vedoucí / školitel: doc. Bc. Jiří Novák, M.Sc., Ph.D.
Řešitel: skrytý - zadáno vedoucím/školitelem
Datum přihlášení: 19.06.2012
Datum zadání: 01.10.2012
Datum a čas obhajoby: 11.02.2015 00:00
Místo konání obhajoby: IES
Datum odevzdání elektronické podoby:20.12.2014
Datum proběhlé obhajoby: 11.02.2015
Oponenti: Mgr. Adrian Babin, M.A.
 
 
 
Kontrola URKUND:
Seznam odborné literatury
1. Fama, E. F. and French, K. R (1992) 'The Cross-Section of Expected Stock Returns', Journal of Finance, vol. 47, no. 2, June, pp. 427–465.
2. Fama, E. F. and French, K. R (1995), 'Size and Book-to-Market Factors in Earnings and Returns', Journal of Finance, vol. 50, no. 1, March, pp. 131–155.
3. Penman, S. H (1996) ' The Articulation of Price-Earnings Ratios and Market-to-Book Ratios and the Evaluation of Growth', Journal of Accounting Research, vol. 34, no. 2, Autumn, pp. 235–259.
4. Feltham, G. A. and Ohlson, J. A (1995) 'Valuation and Clean Surplus Accounting for Operating and Financial Activities', Contemporary Accounting Research, vol. 11, no. 2, pp. 689–731.
5. Ohlson, J. A. (1995) 'Earnings, Book Values, and Dividends in Equity Valuation', Contemporary Accounting Research, vol. 11, no. 2, pp. 661–687.
6. Ohlson, J. A. (2000) 'Residual Income Valuation: The Problems', SSRN working paper.
7. Abeysekera, I. K (2008), 'Measuring and recognizing the nature of goodwill', University of Wollongong working paper.
8. Edwards, E. O. and Bell, P. W (1961) 'The Theory of and Measurement of Business Income', University of Califomia Press, ISBN: 0815322453.
9. Falk H. and Gordon L. A (1977) 'Imperfect markets and the nature of goodwill', Journal of Business Finance & Accounting, vol. 4, no. 4, December, pp. 443–462.
10. Fama, E.F (1998) 'Market efficiency, long-term returns, and behavioral finance', Journal of Financial Economics, vol. 49, pp. 283–306.
11. Lamoureux, C. G. and Lastrapes, W. D (1990) 'Heteroskedasticity in Stock Return Data: Volume versus GARCH effects', Journal of Finance, vol. 45, no. 1, March, pp. 221–229.
12. Preinreich, G. A. D (1938) 'Annual survey of economic theory: the theory of depreciation', Econometrica: Journal of the Econometric Society, vol. 6, no. 3, July, pp. 219–241.
Předběžná náplň práce
Pozn.: Název práce byl změněn. Zanesení změny do SIS čeká na schválení vedoucího práce. Veškerý text kromě názvu práce se týká její aktuální podoby. -autor
Pozn.: Práce bude vypracována v anglickém jazyce; podrobný popis v českém jazyce proto není k dispozici. Později bude vložen alespoň český text abstraktu. -autor
Pozn.: Formulář návrhu práce je k dispozici v příloze (jako "Anotace anglicky - řešitelova verze", jelikož SIS již neumožňuje nahrání generické přílohy).

This thesis will investigate the compensation of executives of sin firms – firms which produce goods or services that society may disapprove of. In particular, I will investigate alcohol, gambling, and tobacco firms. I hypothesize that such firms pay an idiosyncratic premium to their executives that cannot be linked to any particular performance, skill, or other quantifiable benefit rendered to the firm by the executive. I further hypothesize that this premium is essentially a “pay-off” for the executives having to bear a ‘stigma’ of association with a firm that violates social norms.

I do not form a hypothesis as to the precise nature of this stigma, but I suggest it may be either personal (objections to moral implications of executive’s work), social (society’s negative perception of executive because of nature of employer) or public relations-related, career-related (handicap in future or parallel career pursuits because of nature of employer), or any combination of the above.

Prior research suggests that sin firms face costs associated with aversion to their activities generated because those activities violate social norms (despite being legal). Hong and Kacperczyk (2009) find that sin firms trade at roughly a 250 basis point premium in the stock market and link this to their lower ownership share by norm-constrained institutional investors (e.g. pension funds). They hypothesize that since such investors are more sensitive to public perception (and thus, social norms) in choosing their investments, they tend to avoid sin firms to avoid the ‘stigma’ of association with morally objectionable activities. Their results support this theory.

Other “costs of sin” are implied by Beneish et al. (2008), who find that tobacco firms use diversifying acquisitions to mitigate the risk of public expropriation, and that this increases their market value – where in most firms diversifying acquisitions have been found to be value-destroying. Leventis and Hassan (2012) find that sin firms pay higher fees for external audit, which are presumably related to either the firm’s or the auditor’s efforts to “insure” themselves against an expected larger-than-normal impact of a potential reporting problem, as these may be exacerbated by ex ante bad perception of sin firms.

Maug et al. (2012) find that executive compensation is sensitive to firm prestige, as CEOs of firms considered ‘prestigious’ (by professionals and the public) are content with lower compensation (although they only give up this compensation when owner representation is strong enough to ‘make them’). The authors believe that the CEOs essentially see themselves as recipients of an intangible ‘prestige’ asset gained by association with the prestigious firm, and they value this asset enough to forgo a part of their financial compensation in return for receiving it.

According to the cited research, sin firms may face a variety of specific costs linked to the violation of social norms that their business represents. Also, executives appear to be sensitive to the ‘reputation’ of their firm, suggesting that firm reputation transfers onto them by association. Based on these two observations, I believe sin firm executives may suffer from a ‘stigma’ transferred onto them from the firms they work for, and that they may require recompense from these firms.

Evidence supporting this claim would have twofold value: First, it would identify another channel through which the violation of social norms may affect business. This in turn would strengthen the extant results in the literature, which suggest that violation of social norms, even if these are not codified as law and thus may be violated without reprisal from public authority, results in ‘punishment’ through other channels. The fact that these channels are integral to the business environment and do not require active enforcement from the state could additionally have important implications for policymaking in the areas of regulation and public intervention.

Second, the identification of a previously unknown determinant of executive compensation would improve our understanding of the executive labour market. This could be further expounded on in future research, which could attempt to generalize findings about executives to the entire labour force, thus addressing an issue which has significantly broader relevance on the one hand, and a much larger potential cost impact on firms on the other.

Conversely, the primary limiting factor of the potential impact of the results of this thesis is the small absolute share of firm costs that executive compensation represents, and the niche position that the executive labour market occupies both in academic interest and in the sheer volume of value that passes through it. While this does not diminish the importance of the results on a conceptual level, or of their impact on our understanding of executive compensation, it does limit the value of the contribution of this research towards quantifying the total “cost of sin”, as well as towards identifying forces with broad impact on the economy and society in general.
Předběžná náplň práce v anglickém jazyce
Note: Thesis title has been changed; entry of new title into SIS pending approval by supervisor. All text other than title pertains to current thesis version. -author
Note: Thesis proposal form can be found in attachments (as "English annotation - release solver", as the SIS no longer allows the generic attachment type).

This thesis will investigate the compensation of executives of sin firms – firms which produce goods or services that society may disapprove of. In particular, I will investigate alcohol, gambling, and tobacco firms. I hypothesize that such firms pay an idiosyncratic premium to their executives that cannot be linked to any particular performance, skill, or other quantifiable benefit rendered to the firm by the executive. I further hypothesize that this premium is essentially a “pay-off” for the executives having to bear a ‘stigma’ of association with a firm that violates social norms.

I do not form a hypothesis as to the precise nature of this stigma, but I suggest it may be either personal (objections to moral implications of executive’s work), social (society’s negative perception of executive because of nature of employer) or public relations-related, career-related (handicap in future or parallel career pursuits because of nature of employer), or any combination of the above.

Prior research suggests that sin firms face costs associated with aversion to their activities generated because those activities violate social norms (despite being legal). Hong and Kacperczyk (2009) find that sin firms trade at roughly a 250 basis point premium in the stock market and link this to their lower ownership share by norm-constrained institutional investors (e.g. pension funds). They hypothesize that since such investors are more sensitive to public perception (and thus, social norms) in choosing their investments, they tend to avoid sin firms to avoid the ‘stigma’ of association with morally objectionable activities. Their results support this theory.

Other “costs of sin” are implied by Beneish et al. (2008), who find that tobacco firms use diversifying acquisitions to mitigate the risk of public expropriation, and that this increases their market value – where in most firms diversifying acquisitions have been found to be value-destroying. Leventis and Hassan (2012) find that sin firms pay higher fees for external audit, which are presumably related to either the firm’s or the auditor’s efforts to “insure” themselves against an expected larger-than-normal impact of a potential reporting problem, as these may be exacerbated by ex ante bad perception of sin firms.

Maug et al. (2012) find that executive compensation is sensitive to firm prestige, as CEOs of firms considered ‘prestigious’ (by professionals and the public) are content with lower compensation (although they only give up this compensation when owner representation is strong enough to ‘make them’). The authors believe that the CEOs essentially see themselves as recipients of an intangible ‘prestige’ asset gained by association with the prestigious firm, and they value this asset enough to forgo a part of their financial compensation in return for receiving it.

According to the cited research, sin firms may face a variety of specific costs linked to the violation of social norms that their business represents. Also, executives appear to be sensitive to the ‘reputation’ of their firm, suggesting that firm reputation transfers onto them by association. Based on these two observations, I believe sin firm executives may suffer from a ‘stigma’ transferred onto them from the firms they work for, and that they may require recompense from these firms.

Evidence supporting this claim would have twofold value: First, it would identify another channel through which the violation of social norms may affect business. This in turn would strengthen the extant results in the literature, which suggest that violation of social norms, even if these are not codified as law and thus may be violated without reprisal from public authority, results in ‘punishment’ through other channels. The fact that these channels are integral to the business environment and do not require active enforcement from the state could additionally have important implications for policymaking in the areas of regulation and public intervention.

Second, the identification of a previously unknown determinant of executive compensation would improve our understanding of the executive labour market. This could be further expounded on in future research, which could attempt to generalize findings about executives to the entire labour force, thus addressing an issue which has significantly broader relevance on the one hand, and a much larger potential cost impact on firms on the other.

Conversely, the primary limiting factor of the potential impact of the results of this thesis is the small absolute share of firm costs that executive compensation represents, and the niche position that the executive labour market occupies both in academic interest and in the sheer volume of value that passes through it. While this does not diminish the importance of the results on a conceptual level, or of their impact on our understanding of executive compensation, it does limit the value of the contribution of this research towards quantifying the total “cost of sin”, as well as towards identifying forces with broad impact on the economy and society in general.
 
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