[Professor Myeong-Hyeon Cho] Economy Falls into Paradigm of '80s Activism
Date: February 17, 2016 (Wed); The Korea Economic Daily View Article: [Column] Economy Falls into Paradigm of '80s Activism
[Professor Manwoo Lee] The Cycle of Excessive Election Promises and "Curse of Elected Officials" Must Be Stopped
Date: February 5, 2016 (Fri); The Korea Economic Daily View Article: [Column] The Cycle of Excessive Election Promises and "Curse of Elected Officials" Must Be Stopped
[Professor Manwoo Lee] Helter-skelter of Duty Free Shop Law and the National Assembly's Barefaced Economics
Date: January 21, 2016 (Thu); Munhwa Ilbo View Article: Helter-skelter of Duty Free Shop Law and the National Assembly's Barefaced Economics
[Professor Manwoo Lee] The Results of Saying "Tax Cut for the Rich"
Date: January 15, 2016 (Fri); The Korea Economic Daily View Article: [Columns] The Results of Saying "Tax Cut for the Rich"
[Professor Dong-One Kim] Practices that Wear Down Young Job Seekers
Date: January 7, 2016 (Thu); Munhwa Ilbo View Article: Practices that Wear Down Young Job Seekers
The relationship between corporate diversification and corporate social performance
Prof. Jingoo Kang Does diversification affect firm response to stakeholder demands and social issues? Despite extensive interest in corporate diversification in the strategy literature, the relationship between diversification and corporate social performance (CSP) remains largely unexplored. Both product and geographic diversification increase the range of stakeholder demands and social issues that firms face. In addition, according to findings of the diversification and stakeholder management literature, diversified firms have several reasons to respond to increasing stakeholder demands and social issues. Based on these observations, I propose that the level of diversification will be positively related to the CSP of firms. However, when diversified firms have a strong focus on short-term profit, it may discourage firm response to stakeholder demands and investment in social issues, thereby negatively moderating the positive relationship between the level of diversification and CSP. The sample for this study starts from 1,000 of the largest US firms i n term s of market capitalization. I chose large firms for my sample because these firms are more likely to pursue diversification, both product-wise and geographically, The social performance data for sample firms were collected from the Kinder, Lydenberg, Domini (KLD) Social Ratings database, which is a popular source of CSP measure in academic research. To construct other explanatory and control variables, I collected financial data from Compustat’s North America database and Compustat’ s Executive Compensation (Execucomp) database. Since the Execucomp database provides data from 1993 to 2006, the sample period is limites, accordingly. After the three databases were matched, the effective sample size was reduced to 511 firms. The effective sample size in the analysis was 3,044 observations. Empirical testing shows that the levels of unrelated and international diversification have a positive relationship with CSP, and that strong short-term profitability of diversified firms partially and negatively moderates the positive relationship between the level of diversification and CSP.
Pay for Performance from Future Fund Flows: The Case of Private Equity
Prof. Ji-woong Chung The incentives of private equity general partners to create value for their investors (limited partners) are often questioned by investors, industry observers, and academics alike. Critics allege that pay-for-performance incentives from the carried interest profit share (typically 20%) are muted when funds fall short of their hurdle rates, and because fixed fees alone represent a substantial source of income for many private equity groups. In this paper, we point out that the direct incentives from carried interest are only part of the total pay-for-performance incentives that general partners have. The other part is the indirect, marketbased incentives that arise from the fact that general partners’ ability to raise capital for new funds in the future, and so to earn income from managing that capital, depends on the performance of their current funds. To better understand general partners ‘ motivations, it is essential to have a complete picture of their total pay for performance incentives, which is the sum of the direct effect of current performance on earnings from carried interest, and the indirect effect of current performance on earnings from managing future funds. Our goal is to quantify the latter effect, and compare its magnitude to the former. To do so, we present a rational learning model that formalizes the logic by which good performance in the current fund could lead to higher future incomes for general partners through an effect on expected future fundraising. The model provides us with an explicit formula pay-for-performance from future fundraising as a function of i) expected sizes of future funds, consisting of the probability of raising a future fund and its expected size if there is one, ii) the sensitivities to current performance of the likelihood of a general partner raising another fund, and its size if there is one, and iii) expected general partner compensation per dollar of fund size. The model also provides us with several cross-sectional predictions about the magnitude of the ensitivity of future fundraising to current performance that have not been previously tested in the private equity literature, and that in our framework translate directly into cross-sectional differences in indirect pay for performance incentives. The first prediction is that for a given assessment of a general partner’s ability to generate returns, the more ‘’scalable’’ abilities are, the more investors are willing to put money into a following fund. To the extent that buyout funds are more scalable than venture capital funds, future fundraising-performance sensitivity should be greater for buyout funds than for venture capital funds. The model also predicts that as a partnership ages, so its ability is known with more precision, performance in a given fund should have less incremental impact on the market’s overall assessment of the partnership’s ability. This means that future fundraising should be more sensitive to performance for younger partnerships than for older ones. Finally, the model predicts that for a given performance, a manager is more likely to raise a subsequent fund if the prior assessment of his ability is better. It implies that later sequence funds should be more likely to raise a follow-on fund because the average assessment of ability will be higher in later sequence funds than in earlier ones, for the simple reason of their survival. Using a sample of buyout, venture capital, and real estate private equity funds from Preqin over 1993-2010, we find support for all of these predictions. Importantly, there are three main takeaways from the estimates of direct and indirect pay-for-performance. First, indirect pay for performance is sizeable and of the same order of magnitude as direct pay for performance from carried interest. Second, indirect pay for performance is much stronger for buyout funds than for venture capital funds, with real estate in between. Third, it becomes weaker as a partnership ages and manages more funds. The magnitude is reduced by more than half for a fifth-fund buyout partnership compared to a new partnership, and for venture capital there is essentially no indirect pay for performance beyond the fourth fund.