Security Issue Timing: What Do Managers Know, and When Do They Know It? 
Joint with Katharina Lewellen and Jerold B. Warner.
(September 2009) Journal of Finance forthcoming. 
[ Full Text ] [ Online Appendix ]
Abstract: We study put option sales on company stock by large firms.  An often cited motivation for these transactions is market timing.  Like the decision to repurchase stock, the decision to issue puts should be sensitive to whether the stock is undervalued.  We provide new evidence that large firms successfully time security sales.  In the 100 days following put option issues, there is roughly a 5% abnormal stock price return, with much of the abnormal return following the first earnings release date after the sale.  Direct evidence on put option exercises reinforces these findings: exercise frequencies and payoffs to put holders are abnormally low.


Employee Sentiment and Stock Option Compensation 
Joint with Nittai Bergman
(June 2007) Journal of Financial Economics Vol. 84 No. 3.
[ Full Text ]
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.
[ Full Text ] 
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.

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.

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