This paper presents an empirical analysis of top executive compensation from intellectual capital perspective using data from US listed companies and aims to examine whether executives get appropriate compensation. I propose a pay-contribution compensation scheme and extend previous research on agency theory, by exploring how executive compensation contract design may be based on the firm’s intellectual capital (IC). Such features would serve the core purpose of compensation design, which is to create long-term firm value. But inappropriate compensation scheme cannot motivate individual ICs to contribute fully and deteriorate firm value eventually. I view CEO, CFO, COO, CMO, CSO, CTO, CHOs as individual intellectual capital of firms, and through examining key indicators from financial contribution, organizational contribution, relational contribution and growth contribution, I find that their total compensations, total incentive compensations and total cash compensations are not significant on their functions for all executives, implying that free rider problem may exist. I conduct two steps regression models: the first step is to reveal free-rider problem based on the significant relationship between executive compensation and his/her role contribution, and the second step is to examine whether executive compensations rewarded by his/her role contribution have significant influence on firm valuation. The outcome of model 1 shows that CEO and CSO have no free-rider problem, while CTO and CHO may have potential free-rider problem, CFO and CMO may have the risk of free-rider problem, and COO may have moderate free-rider problem. The outcome of model 2 shows that CEO and CFO compensation rewarded by role contribution have significant influence on firm valuation; COO, CMO and CHO compensation rewarded by role contribution have moderate influence on firm valuation; while CTO compensation rewarded by role contribution have little influence on firm valuation and CTO compensation rewarded by role contribution have no influence on firm valuation. My result is consistent with agency theory since free rider may cause executive inertia, reduce individual IC productivity, and impair firm value. The findings suggest that pay-contribution compensation contracts and remuneration schemes focus on different executive positions and strategic roles of individual intellectual capital to avoid free rider problem.

This thesis is composed of four chapters and addresses the contracting issue under strategic experimentation. The first chapter presents an overview of the thesis and introduces the strategic bandit model, which is commonly adopted in the other three chapters. The chapter also previews the main results and implications of the thesis. The second chapter discusses the contracting issue between a principal and a team of agents where the actions of agents are unobservable to the principal. The main contribution of this chapter is to fill the gap of strategic experimentation literature by introducing the free-rider problem in teamwork. The chapter first deals with the optimal hiring choice of the principal under perfect information. Since the belief of the state being good decreases if no one succeeds over time, the paper shows that the principal tends to hire fewer agents in response to the downward-adjusted posterior belief. When the principal can neither monitor the agents' actions nor distinguish the agents who succeed, this chapter shows the optimal incentivising contract consists of an upfront payment from the agents to the principal, a bonus to every agent conditioning on success and a stopping time. Under this contract, the principal can implement first-best experimentation and incentivise all agents to work until the optimal stopping time. The third and fourth chapters discuss the financial contracting issue in innovation where an innovator requires external funding from an investor. The third chapter adopts a \bad news" exponential bandit to study the financial contracting under adverse selection between the innovator and the investor. The innovator, owns the innovation project, is privately informed of either a high or low prior belief of the good state but seeks a large amount of external investment from the less-informed investor. Experimentation is conducted by the innovator using internal funding before the external investment. The posterior belief about the good state increases in the amount of internal funding if no bad news arrives during experimentation, but the project will be abandoned as long as bad news arrives. The chapter shows that the amount of internal funding can be used by the investor to separate the agents with different priors. Under the unique least-costly separating equilibrium, the high-prior innovator spends even more than the low-prior first-best internal funding in order to deter the low-prior one from mimicking, and the low-prior one remains at his first-best. This chapter enriches the financial experimentation literature by proposing internal funding as a novel signalling tool and establishing a Pareto dominating separating equilibrium. The fourth chapter studies a multi-stage innovation financing problem between an agent and an investor with asymmetric information on the progress of the project. The innovation is comprised of two stages where the agent needs to complete the first development stage in order to proceed to the second experiment stage. The model assumes that the completion of the first stage can be early or late following a binary distribution, and the arrival of success in the experimentation stage follows a "good news" exponential bandit. Each period, a fixed amount of investment is needed from the investor. However, the investor can not observe nor verify the project progress. The chapter shows that the optimal incentive-compatible contract consists of differential maximum funding periods in the event of early and late completion of the first stage respectively and subsequent bonuses to the investor conditioning on a success in the second stage. We prove that the first-best experimentation time is attainable as long as the bonus of the late completion exceeds that of the early completion, and the difference between the two bonuses should be confined within a certain range. In the extension, we consider the case when the first stage completion time is informative such that an early completion indicates a higher prior in the good state than the late completion. Under imperfect information, the agent has a stronger incentive to mimic the early completion if the first stage is completed late as a longer experimentation time will be granted according the first-best contract. The chapter proves that the first-best is still achievable under a similar bonus contract but the difference between the two bonuses becomes smaller. This chapter contributes to the experimentation financing literature including the information imperfectness on project progress and multi-stage spillover effects.

This thesis consists of three self-contained essays dealing with different aspects of macroeconomics and political Economy. The Relative Price of Investment Goods and Sectoral Contract Dependence I develop a quantitative model to explain the relationship between TFPs at the aggregate and sector levels and contracting institutions across countries. The incomplete contract enforcement induces distortions in the production process which come from the “hold up” problem between a final goods firm and its suppliers. Because investment goods sector is more contract dependent, its productivity suffers more from the distortion. In turn, countries endowed with weaker contract enforcement institutions face higher relative prices of investment goods. A Ricardian Model of the Labor Market with Directed Search I analyze how search friction affects the allocation in a Ricardian model of the labor market. The equilibrium shows that the matching pattern is partially mixed: Some tasks are only performed by skilled workers; some are only performed by unskilled workers; the remaining tasks are performed by both skilled and unskilled workers. The mixed matching pattern implies a mismatch in equilibrium. It turns out that the reason for the mismatch has its roots in search friction. In addition, I show labor market institutions have interesting implications for the unemployment rate and mismatch. A Dynamic Analysis of the Free-rider Problem I argue that special interest groups overcome their free-rider problem thanks to distorted government policy. As policy confers monopoly privileges on a group, it can also preserve and promote group’s organization. The key to sustaining the organization of the group is a dynamic incentive: when distorted policy generates rents for a group, each member of the group wish to make contributions not just to raise their rents today; they want to sustain their cooperation so that they will be able to influence policy in the future.

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Market Liquidity, Active Investment, and Markets for Information. This paper studies a financial market in which investors choose among investment strategies that exploit information about different fundamentals. On the one hand, the presence of other informed investors generates illiquidity. On the other hand, investors who use different strategies can serve as quasi-noise traders for each other, thereby also supplying each other with liquidity. Thus, investment strategies can be substitutes or complements. Such externalities in information acquisition have effects on investor herding, comovement in prices and liquidity across assets, trade volume, and the informational role of prices. They further affect the relationship between financial markets and information markets. Information market competition fosters investor diversity, whereas monopoly power promotes investor herding. Also, in order to benefit from quasi-noise trading, a financial institution may engage in both proprietary trading and information sales. Security-Voting Structure and Bidder Screening. This paper shows that non-voting shares can promote takeovers. When the bidder has private information, shareholders may refuse to tender because they suspect to sell at an ex-post unfavourable price. The ensuing friction in the sale of cash flow rights can prevent an efficient sale of control. Separating cash flow and voting rights mitigates this externality, thereby facilitating takeovers. In fact, the fraction of non-voting shares can be used to discriminate between efficient and inefficient bidders. The optimal fraction decreases with managerial ability, implying an inverse relationship between firm value and non-voting shares. As non-voting shares increase control contestability, share reunification programs entrench managers of widely held firms, whereas dual-class recapitalizations can increase shareholder wealth. Signaling in Tender Offer Games. This paper examines whether a bidder can use the terms of the tender offer to signal the post-takeover security benefits to the shareholders of a widely held target firm. As atomistic shareholders extract all the gains in security benefits, signaling equilibria are subject to a constraint that is absent from bilateral trade models. The buyer (bidder) must enjoy gains from trade that are excluded from bargaining (private benefits), but can nonetheless be relinquished and enable shareholders to draw inference about the security benefits. Restricted bids and cash-equity offers do not satisfy these requirements. Dilution, debt financing, probabilistic takeover outcomes and toeholds are all viable signals because they make bidder gains depend on the security benefits in a predictable manner. In all the signaling equilibria, lower-valued types must forgo a larger fraction of their private benefits and these signaling costs prevent some takeovers. When the bidder has additional private information about the private benefits as in the case of two-dimensional bidder types, fully revealing equilibria cease to exist. This does not hold once bidders can offer not only cash or equity but also (more) elaborate contingent claims. Offers which include options avoid inefficiencies and implement the symmetric information outcome. Goldrush Dynamics of Private Equity. This paper presents a simple dynamic model of entry and exit in a private equity market with heterogeneous private equity firms, a depletable stock of target companies, and rational learning about investment profitability. The predictions of the model match a number of stylized facts: Aggregate fund activity follows waves with endogenous transitions from boom to bust. Supply and demand in the private equity market are inelastic, and the supply comoves with investment valuations. High industry performance precedes high entry, which in turn precedes low industry performance. There are persistent differences in fund performance across private equity firms, first-time funds underperform the industry, and first-time funds raised in booms are unlikely to be succeeded by a follow-on fund. Fund performance and fund size are positively correlated across firms, but negatively correlated across consecutive funds of a private equity firm. Finally, booms can make ”too much capital chase too few deals.” Reputable Friends as Watchdogs: Social Ties and Governance. To examine how governance is affected when a designated supervisor befriends the person to be supervised, this paper embeds a delegated monitoring problem in a social structure: the supervisor and the agent are friends, and the supervisor desires to be socially recognized for having integrity. Strengthening the friendship weakens the supervisor’s monitoring incentives, forging an alliance against the principal (bonding). But the agent also grows more reluctant to put the supervisor’s perceived integrity at risk, thus becoming more aligned with the principal (bridging). If the supervisor’s desire for social recognition is strong, the principal’s preferences regarding the supervisor-agent friendship are bipolar. Weak friendship makes the supervisor monitor intensively to save face. Strong friendship leads the supervisor to abandon monitoring but the agent to behave well in order to protect the supervisor from losing face. The strength of friendship necessary for the latter outcome decreases in the supervisor’s desire for esteem; that is, image concerns leverage the bridging effect of friendship. This suggests that overlapping personal and professional ties can enhance delegated governance in cultures or contexts where social recognition is important, and provides a novel perspective on issues related to crony capitalism, corporate governance, and organizational culture. / Diss. Stockholm : Handelshögskolan, 2009 Sammanfattning jämte 5 uppsatser