Yesterday, Treasury Department’s special master for compensation under President Obama, Kenneth Feinberg, put severe limits on compensation to top earners
at seven companies that received “exceptional help.”
This is getting the expected commentaries around the economics blogosphere here
It is possible that shareholders are being duped into offering “excessive” compensation. If so, such outside help would mean that shareholders get to keep more of the profits from company operations. On the other hand, it is possible that these were efficient labor contracts that “incentivized” top earners to work hard. If the former, market value of affected firms should rise. If the latter, it should fall.
As they say, let’s role the tape from yesterday. I was able to find intra-day stock market data on three of the affected firms, AIG, BofA, and Citigroup. (I am not smart enough to find General Motors, Chrysler and the financing arms of the two automakers.) The drop off in share price in the late afternoon after the announcement for all three was pretty consistent. They each fell about 2.3% but the market as a whole fell too. Subtracting off the fall in the S&P500 of -1.8% over the same period yields returns in excess of general market trends. (For you finance guys, this assumes beta is one). The closest I could find for market value this morning was the shares outstanding in December, 2008 from CRSP. Multiplying shares outstanding by the “excess” change in price sums to ~$1.8 million for these three firms.
|Firm ||Share Price Pre ||Share Price Post ||Percent change ||Excess Returns ||Market Value |
|AIG ||39.97 ||39.03 ||-2.35% ||-0.87% ||-$911,591 |
|BofA ||16.90 ||16.51 ||-2.31% ||-0.82% ||-$683,071 |
|Citigroup ||4.53 ||4.42 ||-2.43% ||-0.95% ||-$227,651 |
|Sum || || || || ||-$1,822,313 |
- Rarely does one see such stark and quick confirmation of the government’s ability to destroy wealth.
- Perhaps the problem is that the pay czar is only concerned with bridging the chasm between Wall Street and Main Street and not on shareholder wealth. Perhaps his compensation should be tied to the performance of the firms he oversees.
David from the comments is right that my "back of the envelope" exercise misses some key subtleties. I agree that these assets are likely riskier than average (beta may be greater than one) meaning that the announcement would have had a smaller effect. Also, as he points out, Pr(intervention) > 0 before the announcement and Pr(intervention) <1 afterward, which would inflate my estimates. Moreover, some of my “control group” (the S&P500) were likely also 'treated.' That is, the announcement may have lead market participants to think there is greater chance for government oversight of management compensation more broadly and some of the drop in the S&P is due to the announcement. To tease this out, one might compare the affect on firms based on the likelihood that they are immune to the intervention (healthier, lower compensation levels). All said, the back of the envelope calculation is a just that and my claim about that this was ‘stark confirmation’ was too strong.
Still, for a policy intervention, I would shift the burden of proof. One should have evidence that the intervention has positive and significant effects before a decision to implement.