Corporate Governance

This paper examines transfer pricing in multinational firms when individual divisions face different income tax rates. Assuming that a firm decouples its internal transfer price from the arm's length price used for tax purposes, we analyze the effectiveness of alternative pricing rules under both cost- and market-based transfer pricing. In a tax-free world, Hirshleifer (1956) advocated that the internal transfer price be set equal to the marginal cost of the supplying division.

The front-page corporate scandals that erupted in the U.S. economy beginning in 2001—Enron, WorldCom, Tyco, Adelphia, HealthSouth, and others—have undermined confidence in the U.S. business system and raised questions about the effectiveness of corporate governance in the United States.

We argue that the root cause behind the recent corporate scandals associated with CEO pay is the technology bubble of the latter half of the 1990s. Far from rejecting the optimal incentive contracting theory of executive compensation, the recent evidence on executive pay can be reconciled with classical agency theory once one expands the framework to allow for speculative stock markets.

This paper considers the problem of sequential parameter and state estimation in stochastic volatility jump diffusion models. We describe the existing methods, the particle and practical filter, and then develop algorithms to apply these methods to the case of stochastic volatility models with jumps. We analyze the performance of both approaches using both simulated and S and P 500 index return data. On simulated data, we find that the algorithms are both effective in estimating jumps, volatility, and parameters.

We consider the role of the endowment in nonprofit organizations. Nonprofit managers often describe the endowment, or fund balance, as serving a precautionary savings function. We provide a description of endowment size, for nonprofit organizations in a wide range of industries in the United States, and find that a large number of organizations have endowments that exceed levels that would normally be considered to be appropriate from a consumption smoothing prospective.

We consider a setting where a firm delegates an investment decision and, subsequently, a sales decision to a privately informed manager. For both decisions corporate income taxes have real effects. We show that compensating the manager based on pre-tax residual income can ensure after-tax NPV-maximization ("goal congruence") for each decision problem in isolation. However, this metric fails if both decisions are nontrivial, since it requires asset-specific hurdle rates and hence precludes asset aggregation.

This paper studies the capital budgeting process in a setting where a manager is privately informed about the profitability of an investment project and enjoys nonpecuniary benefits of control ("empire benefits"). I characterize the optimal required rate of return and show that a delegation scheme with residual income-based compensation can replicate the benchmark performance achieved under centralization. The main result of the paper is that the optimal capital charge rate for computing residual income always exceeds the required rate of return as a result of empire benefits.

<p>Corporate governance is concerned with the resolution of collective action problems among dispersed investors and the reconciliation of conflicts of interest between various corporate claimholders. In this survey we review the theoretical and empirical research on the main mechanisms of corporate control, discuss the main legal and regulatory institutions in different countries, and examine the comparative corporate governance literature.

Recent events in several countries have underscored the importance of good governance in private occupational pension plans. The present paper uses contract theory to analyze the interplay of residual claims and control rights in private pensions. The residual claimant is the plan sponsor in a defined benefit (DB) plan and the pool of beneficiaries in a defined contribution (DC) plan. The main control rights we examine relate to decisions on funding, asset allocation, and asset management.