Dynamic Capital Allocation and Managerial Compensation

Author(s):  
Shiming Fu
2016 ◽  
Vol 42 (3) ◽  
pp. 428-461 ◽  
Author(s):  
Lorenzo Casavecchia ◽  
Ja Young Suh

In this study, we show that the option-like structure of equity-based compensation encourages managerial risk-taking and provide new evidence on the way in which CEO’s risk-taking could manifest itself in a multi-segment firm. Our results show that a greater sensitivity of managerial compensation to shareholder wealth—as proxied by CEO’s portfolio vega—leads to greater risk-taking through active capital allocation. We then analyze the impact of risk-taking on shareholder wealth and demonstrate that risk-taking is positively associated with future stock returns. Overall, this article contributes to the literature by providing evidence that equity-based compensation does actually promote the alignment of interests between shareholders and managers.


Author(s):  
Alan G. Weinstein ◽  
V. Srinivasan

1970 ◽  
Vol 10 (4) ◽  
pp. 491-499
Author(s):  
F. E. Banks

This note is an extension of several contributions to the problem of re¬source allocation in a developing economy. In separate papers, I.M.D. Little and F. Seton* have introduced a model in which labour in a developing economy cannot be shifted from the subsistence to the industrial sector at zero opportunity cost, even though this labour displays zero marginal product in its 'traditional' occupations; and in what follows this problem will be attacked via a diagramma¬tic analysis. A short appendix will treat a side issue of the topic. As Little presented the model, there was an initial amount of capital K to be divided between two sectors, the I (industrial) sector, and the C (subsistence, traditional, or agricultural) sector. In the C-sector, there is excess labour or dis¬guised unemployment, in the sense of Professor W. A. Lewis2, in that the marginal product of labour in this sector is taken as equal to zero. As it happens, however, this labour cannot be moved to the I-Sector without an increase in production in the C-sector. The reason for this is because as labour is transferred to the industrial sector, consumption per head increases in the C-sector, thus decreasing the surplus available for workers being transferred to the I-sector. The transfer can only be carried out if a surplus equal to the difference between the industrial wage in C-goods and the amount of C-goods 'released' by the C-sector is forth¬coming, and for this an increased production of C-goods (via the input of capital into the C-sector) must take place. A similar situation would exist if transferring workers required a wage differential; or if C-goods had to be exported to obtain certain types of capital goods for the labour being reallocated, and/or housing, training, etc.


Author(s):  
Iryna Nazarova

The paper considers various interpretations of the essence of equity capital. The concept of equity capital is viewed from the perspective of property as a venture capital, i. e. business property, which does not guarantee profits and dividends, and for which there is no clear schedule of returning funds to investors and shareholders. The most common equity capital components in national and foreign practice are examined and compared. It is pointed out that the equity components mainly used in Ukraine are defined by the National Accounting Standards. Alternatively, the structure of equity capital components in foreign practice relies on the Conceptual Framework of Financial Statements, but it is further detailed by national standards of each country and depends on its policy and accounting characteristics. The structure of equity capital in foreign practice may be influenced by shareholders’ decisions on the establishment of funds (additional capital), allocation of profits, transactions with treasury shares. It is made clear that in most countries equity capital components include joint stock capital, surplus reserves, and retained profit. The article reviews the classification of equity capital, viewed as the key factor, and determines its influence on accounting principles and policies. It is concluded that in regulatory documents, there are no clear lines between types of equity capital. The paper also discusses various views of scholars on equity capital arrangement. It is found that in research works, equity capital is classified based on various characteristics, but the majority of researchers consider sources of equity capital to be the main criterion. In addition, there is no consensus among academics as to what types of equity capital can be singled out by the criterion described. Taking into consideration some proposals of scholars and foreign practice related to ac- counting of equity capital, the author develops a generalized structure of equity capital which is based on the sources of capital formation and includes: invested capital, particularly registered capital (statutory and mandatory share capital), corrective capital (unpaid and withdrawn capital), additional capital (capital received from investors for stock that exceeds the par value of the stock, i.e. additional equity capital); acquired capital (assets received for free, capital formed from revaluation of assets, other capital) and reinvested capital (retained profits (uncovered losses) and surplus reserves). The above equity structure can be used to prepare financial statements in order to increase its informational value. Proposals are given on how to improve methods for accounting of equity capital, in particular accounting of additional capital invested by founders in the account entitled “Non-registered investments of owners”.


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