My research and papers

Here is my working papers.

The real costs of CEO compensation - the effect of behindness aversion of employeesSSRN link

Do employees who compare themselves to the CEO matter for executive compensation? Using German establishment-level wage data, we show that employee wages are increasing in CEO compensation. When CEO compensation increases 1%, the median employee’s wage increases by about 0.04%. Higher CEO compensation also increases the probability for the existence of employee stock ownership plans. We use a difference-indifference setting to provide causal evidence for the relationship. Our findings suggest that behindness aversion of employees is an important driver of wages and increases the costs of executive compensation significantly. We structurally estimate a principal-agent model with two agents (CEO, representative employee) to identify the behindness aversion parameters.

- Joint work with Ingolf Dittmann and Christoph Schneider.
- To be presented at China International Conference in Finance (CICF 2018) in Tianjin.
- Presented at 12th Annual Conference on Asia-Pacific Financial Markets (CAFM 2017) in Seoul, the annual meeting of the German Finance Association (DGF 2017) in Ulm*, the Erasmus finance brown bag seminar series.

Wage gap and stock returns

We propose an asset pricing model in which the optimal wage gap between managers and workers increases with managerial skills. In a world with noise traders and short-sales constraints, we show that firms with lower wage gaps should trade at a premium, and the mispricing becomes even stronger if some investors exhibit inequality aversion. Using a unique data set of German firms, we provide strong support for the model's predictions. The results suggest that pay inequality within firms has important implications for asset prices.

- Joint work with Ingolf Dittmann and Maurizio Montone.
- To be presented at Global Finance Conference in Paris.
- Presented at IFABS 2017 in Ningbo, the IFABS 2017 in Oxford*, the Spanish Finance Association Meetings in Barcelona*, the Behavioral Finance Working Group Conference in London*, the Israel Behavioral Finance Conference in Tel Aviv*, and the Erasmus finance brown bag seminar series*.
Probability-weighting CEOs and optimal contracts

Because of the option grants and other long-term incentives, CEO contracts feature increasing pay-performance sensitivity (PPS). Previous literature use different theories to explain the convexity in CEO pay structure, but the optimal non-linear contract exhibits convexity only around the central region. In this paper, I make two contributions: First, I show that when CEOs assign higher probability to extreme cases, the optimal non-linear contract features convexity even if performance goes to the far end. This explains the existence of incentive pay and increasing PPS in CEO contracts. Second, I find that when stock returns follow a normal distribution, probability weighting generates an asymptotically normal distribution with different parameters. I use this sigma-mu transformation to approximate the probability weighting process, which helps give the close- form solution for the optimal non-linear CEO contract. Finally, I calibrate the model with observed contracts of US CEOs. To sum- marize, shareholders exploit probability-weighting to provide cheap incentives that encourage CEOs to exert more effort.\\

- Single-authored paper.
- To be presented at Behavioral Finance Working Group Conference in London.