Corporate Finance.

• Position: Program and Working Group Meeting

The NBER's Program on Corporate Finance met in Cambridge on November 10. NBER Research Associate Andrei Shleifer of Harvard University organized the meeting. These papers were discussed:

Camelia M. Kuhnen, Northwestern University, and Jeffrey Zwiebel, Stanford University, "Executive Pay, Hidden Compensation, and Managerial Entrenchment"

Discussant: Xavier Gabaix, MIT and NBER

Jin Xu, University of Chicago, "What Determines Capital Structure? Evidence from Import Competition"

Discussant: Michael Weisbach, University of Illinois and NBER

Bart Lambrecht, University of Lancaster, and Stewart C. Myers, NBER and MIT, "Debt and Managerial Rents in a Real-Options Model of the Firm"

Discussant: Douglas W. Diamond, University of Chicago and NBER

Douglas Baird, University of Chicago; Arturo Bris, Yale University; and Ning Zhu, University of California, Davis, "The Dynamics of Large and Small Chapter 11 Cases: An Empirical Study" Discussant: Michelle J. White, University of California, San Diego and NBER

Nicola Gennaioli, Stockholm University, and Stefano Rossi, Stockholm School of Economics, "Optimal Resolutions of Financial Distress by Contract"

Discussant: Kenneth Ayotte, Columbia University

Simeon Djankov and Caralee McLiesh, World Bank, and Oliver D. Hart and Andrei Shleifer, Harvard University and NBER, "Debt Enforcement Around the World"

Discussant: David S. Scharfstein, Harvard University and NBER

Kuhnen and Zwiebel consider a managerial optimal framework for top executive compensation, where top management sets its own compensation subject to limited entrenchment, instead of the conventional setting where such compensation is set by a board that maximizes firm value. Top management would like to pay themselves as much as possible, but are constrained by the need to ensure sufficient efficiency to avoid replacement. Shareholders can remove a manager, but only at a cost, and therefore will only do so if the anticipated future value of the manager (given by anticipated future performance net future compensation) falls short of that of a replacement by this replacement cost. In this setting, observable compensation (salary) and hidden compensation (perks, pet projects, pensions) serve different roles for management and have different costs, and both are used in equilibrium. The authors examine the relationship between observable and hidden compensation and other variables in a dynamic model, and derive a number of unique predictions regarding...