2007 Headlines

Johnson School Co-Hosts Business of Executive Compensation

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More than 60 Cornell Law School, Johnson School, university graduates, and friends met on January 18, 2007, in New York City for a lively panel discussion: "The Business of Executive Compensation: Are CEOs paid too much?" The event was sponsored by the school, the Johnson School Club of New York, the Law School at Cornell University, and Debevoise & Plimpton LLP, which hosted the event at its Midtown offices.

The panel featured Johnson School Assistant Professor of Finance Yaniv Grinstein, who talked about his seminal research tracking increase in executive compensation, and how growth in pay takes a bite out of profits. Nor does rising compensation appear to be linked to company performance—about 90 percent of growth in pay is not explained by changes in company profits, Grinstein said.

The discussion was particularly timely, in light of new SEC regulations requiring more transparency in how companies report executive compensation packages. "Investors need to know what's going on, and accounting will never provide the full picture," said Neri Bukspan, managing director, Standard & Poor's Credit Market Services.

The panel was rounded out by Lisa L. Hunter, '77, president, Newport Consulting Group, Inc., a firm specializing in developing comprehensive compensation programs and enhancing organizational effectiveness, and Neri Bukspan, managing director, Standard & Poor's Credit Market Services. David Mason, JD '88, moderated the panel. Mason is a partner in Debevoise & Plimpton, and a member of the firm's executive compensation and employee benefits group, as well as its private equity group.

Mark Leary's Paper Noted as One of Best Papers in Corporate Finance for 2006 by the American Finance Association

Paper Explores When and How Firms Rebalance their Capital Structures

January 11, 2007 | Ithaca, NY - Professor Mark Leary's paper "Do Firms Rebalance Their Capital Structures?" was recognized on January 6, 2007 as one of the top three papers in corporate finance for 2006, receiving a "Distinguished Paper" award from the American Finance Association. All papers published in The Journal of Finance in 2006 are eligible for prizes. Mark Leary is an assistant professor of finance at the Johnson School at Cornell University.

Co-authored by Michael Roberts at The Wharton School, University of Pennsylvania, the paper finds that firms actively rebalance their capital structures to stay within an optimal range that balances the costs and benefits associated with varying degrees of financial leverage. While shocks to leverage may push leverage away from its optimal level for extended periods, this is more likely due to adjustment costs than indifference toward capital structure as argued by past research. Further, their research shows that:

The presence of adjustment costs results in shocks having a persistent effect on leverage, despite active rebalancing behavior by firms.
Consistent with the nature of security issuance costs, firms are often inactive with respect to their financial policy, but when they do issue or repurchase debt and equity, they tend to do so in several closely spaced, often consecutive, quarters.
The effect of equity issuances on firms' leverage is erased within two years by subsequent debt issuances.
The effect of large positive or negative equity shocks on leverage is erased within the two to four years subsequent to the shock by debt issuances or retirements.
The finding of a significant response to both low or decreasing leverage and high or increasing leverage is consistent with the existence of a target range for leverage, but firms appear more concerned about excessively high leverage than excessively low leverage.

To view a copy of the paper or to speak with Mark Leary about this research, please contact:

Deirdre Snyder
Public Relations Officer
The Johnson School at Cornell University
Email: dgs37@cornell.edu
Phone: 607.255.3494
Cell: 607.592.2188