- Skill-biased technological change and executive pay, revised June 2012.
View Abstract ►Why has CEO pay exploded over the past four decades? I argue that the spike in executive pay is explained by changes in the skill of the workforce induced by skill-biased technological change. The introduction of the microprocessor and modern hard drive in the early 1970s combined with the subsequent decline in computer prices is a skill-biased technological change; computers disproportionately benefit skilled workers. To exploit this cross-section variation, I use the exogenous decline in computer prices as an instrument to estimate a 2SLS regression of CEO pay on industry-level employee skill. The empirical findings suggest that the change in employee skill caused by the fall in computer prices from 1984 to 2010 led to a 4-fold increase in average CEO pay. These results are robust to controlling for corporate governance.
- Revenge of the Steamroller: ABCP as a Window on Risk Choices (with Carlos Arteta, Mark Carey, and Ricardo Correa), revised July 2010.
View Abstract ►A run on debt issued by asset-backed commercial paper (ABCP) vehicles that began in August, 2007 was the cause of the money market shock that transformed serious but manageable mortgage-related credit problems into a financial crisis. We examine why some banks sponsored vehicles that specialized in investments in asset-backed securities and why the great majority of vehicles were sponsored by European banks even though the assets and liabilities of the vehicles were predominantly bought and issued in U.S. financial markets. Vehicle return and growth patterns are more consistent with excessive-risk-taking explanations than with undistorted portfolio optimization by sponsors. Accounting and regulatory treatments do not appear to be the motivation for excessive risk-taking, but the evidence is consistent with both government-induced distortions and agency problems at banks playing an important role.
- Friends or Foes? Target Selection Decisions of Sovereign Wealth Funds and Their Consequences (with Ugur Lel), 2011, Journal of Financial Economics 101, 360–381.
View Abstract ►This paper examines investment strategies of Sovereign Wealth Funds (SWFs), their effect on target firm valuation, and how both of these are related to SWF transparency. We find that SWFs prefer large and poorly performing firms facing financial difficulties. Their investments have a positive effect on target firms' stock prices around the announcement date but no substantial effect on firm performance and governance in the long-run. We also find that transparent SWFs are more likely to invest in financially constrained firms and have a greater impact on target firm value than opaque SWFs. Overall, SWFs are similar to passive institutional investors in their preference for target characteristics and in their effect on target performance, and SWF transparency influences SWFs' investment activities and their impact on target firm value.
The working paper version of this paper is available at SSRN. Note that this paper was previously circulated under the title, Friends Or Foes?: The Stock Price Impact of Sovereign Wealth Fund Investments and the Price of Keeping Secrets.