Knowledge that Transforms

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An abstract is not available for this content so a preview has been provided. As you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

An abstract is not available for this content so a preview has been provided. As you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

An abstract is not available for this content so a preview has been provided. As you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

An abstract is not available for this content so a preview has been provided. As you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

An abstract is not available for this content so a preview has been provided. As you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

An abstract is not available for this content so a preview has been provided. As you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

Cochrane's Asset Pricing now appears in a revised edition that unifies and brings the science of asset pricing up to date.

This paper analyzes the characteristics and impact of loans made to executives for stock purchase, option exercise, and relocation. We find that loans made to assist executives in purchasing stock or exercising options are larger and have higher interest rates than relocation loans. All types of loans, however, are issued at below-market interest rates, on average. We also find that while stock purchase loans are given to managers with low existing ownership, option exercise loans are given to managers with high existing ownership and high cash compensation. Finally, our results indicate that executive stock ownership increases following stock purchase and option exercise loans. For managers as a whole, a loan that enables a manager to buy 100 shares of stock results in only an eight share increase in ownership. However, the relation between ownership changes and stock purchase loans is much stronger for low ownership managers.

Building on the managerial entrenchment literature, we develop and test a novel perspective on payout policy that integrates the influence of internal governance mechanisms, investment opportunities, management compensation, and monitoring by large shareholders. Our study incorporates both dividend payments and share repurchases, and examines the determinants of the likelihood and the level of payouts. Our model performs well in both in-sample and out-of-sample predictions on a sample of 2,081 firms during 1992–2000. We find that both the likelihood and the level of payouts are significantly and positively (negatively) related to factors that increase (decrease) executive entrenchment levels, even when controlling for size, leverage, and the proportion of tangible to total assets. We identify factors that significantly affect the likelihood but not the level of payouts (or vice versa), and show that entrenchment has an asymmetric influence on dividend vs. shares repurchase policy.