Dirk Jenter's Homepage

Dirk Jenter
Ford International Career Development Professor
Assistant Professor of Finance
NBER Faculty Research Fellow

Home | Research | Sloan Faculty Profile

Research Interests

Corporate Finance, Behavioral Finance, Economics of Organizations, Capital Markets

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Academic C.V.

Working Papers and Work-In-Progress

CEO Turnover and Relative Performance Evaluation
(May 2008) Joint with Fadi Kanaan.
Award for the Best Corporate Finance Paper at the 2006 Western Finance Association Meeting.
[ Full Text ]
Abstract: This paper examines whether CEOs are fired after bad firm performance caused by factors beyond their control. Standard economic theory predicts that corporate boards filter out exogenous industry and market shocks from firm performance before deciding on CEO retention. Using a new hand-collected sample of 1,627 CEO turnovers from 1993 to 2001, we document that CEOs are significantly more likely to be dismissed from their jobs after bad industry or bad market performance. A decline in the industry component of firm performance from its 75th to its 25th percentile increases the probability of a forced CEO turnover by approximately 50 percent. This result is at odds with the prior empirical literature, which showed that corporate boards filter exogenous shocks from CEO dismissal decisions in samples from the 1970s and 1980s. Our findings suggest that the standard CEO turnover model is too simple to capture the empirical relation between performance and forced CEO turnovers, and we evaluate several extensions to the standard model.

Security Issue Timing: What Do Managers Know, and When Do They Know It?
(November 2006) Joint with Katharina Lewellen and Jerold B. Warner.
[ Full Text ]
Abstract: We study put option sales undertaken by corporations during their repurchase programs. Put sales’ main theoretical motivation is market timing, providing an excellent framework for studying whether security issues reflect managers’ ability to identify mispricing. Our evidence is that these bets reflect timing ability, and are not simply a result of overconfidence. In the 100 days following put option issues, there is roughly a 5% abnormal stock price return, and the abnormal return is concentrated around the first earnings release date following put option sales. Longer term effects are generally not detected. Put sales also appear to reflect successful bets on the direction of stock price volatility.

Conflicts of Interests Among Shareholders: The Case of Corporate Acquisitions
(November 2006) Joint with Jarrad Harford and Kai Li.
[ Full Text ]
Abstract: We identify important conflicts of interests among shareholders and examine their effects on corporate decisions. When a firm is considering an action that affects other firms in its shareholders’ portfolios, shareholders with heterogeneous portfolios will disagree about whether to proceed. This effect is large and measurable in the case of mergers and acquisitions, where bidder shareholders with cross-holdings in the target want management to maximize a weighted average of both firms’ equity values. Empirically, we find that these cross-holdings are large for a significant group of institutional shareholders in the average acquisition and even for a majority of institutional shareholders in a significant number of deals. We test whether cross-holding shareholders have influence over management in structuring deals and find that managers effectively ignore their shareholders’ portfolio concerns and behave as if the cross-holdings do not exist. We note that managers are compensated to behave as undiversified shareholders in their own firm.

Publications

Employee Sentiment and Stock Option Compensation
(November 2006) Joint with Nittai Bergman.
Forthcoming at the Journal of Financial Economics.
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Abstract: The use of equity-based compensation for rank-and-file employees is a puzzle. We analyze whether the popularity of option compensation may be driven by employee optimism, and show that optimism by itself is insufficient to make option compensation optimal. The crucial insight is that firms compete with financial markets as suppliers of equity to employees and that employees’ access to the equity market restricts firms’ ability to profit from employee optimism. Firms must be able to extract some of the implied rents even though employees can purchase company equity in the financial markets. Such rent extraction becomes feasible if employees prefer the stock options offered by firms to the equity offered by the market, or if the traded equity is overvalued. We provide empirical evidence that firms use broad-based options compensation when boundedly rational employees are likely to be excessively optimistic about company stock, and when employees are likely to strictly prefer options over stock.

Market Timing and Managerial Portfolio Decisions
(August 2005) Journal of Finance Vol. 60 No. 4.
Nominated for the Brattle Prize for the Best Corporate Finance Paper in the Journal of Finance.
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Abstract:This paper provides evidence that top managers have contrarian views on firm value. Managers' perceptions of fundamental value diverge systematically from market valuations, and perceived mispricing seems an important determinant of managers' decision making. An analysis of insider trading patterns shows that low valuation ("value") firms are regarded as undervalued by their own managers relative to high valuation ("growth") firms. This finding is robust to controlling for non-information motivated trading. Managers in value firms actively purchase additional equity on the open market despite substantial prior exposure to firm risk through stock and option holdings, equity-based compensation and firm-specific human capital. Further evidence links managers' private portfolio decisions directly to changes in corporate capital structures, suggesting that managers actively time the market both in their private trades and in firm-wide decisions.

Selling Company Shares to Reluctant Employees: France Télécom’s Experience
(January 2004) Journal of Financial Economics Vol. 71 No. 1.
[ Abstract ] [ Full Text ] Joint with Francois Degeorge, Alberto Moel and Peter Tufano.

Old Stuff

Executive Compensation, Incentives, and Risk
(April 2002) [ Full Text ]
Award for the Outstanding Doctoral Student Paper at the 2001 SFA Meeting.

Abstract: This paper analyzes the link between equity-based compensation and created incentives by (1) deriving a measure of incentives suitable for both linear and non-linear compensation contracts, (2) analyzing the effect of risk on incentives, and (3) clarifying the role of the agent’s private trading decisions in incentive creation. With option-based compensation contracts, the average pay-for-performance sensitivity is not an adequate measure of ex-ante incentives. Pay-for-performance covaries negatively with marginal utility and hence overstates the created incentives. Second, more noise in the performance measure may imply that also the manager is less certain about the effect of effort on performance, which in turn makes her less willing to exert effort. Finally, the private trading decisions by the manager have first-order effects on incentives. By reducing her holdings of the market asset, the manager achieves an effect similar to indexing the stock or option grant, making explicit indexation of the contract redundant.