This paper uses an agency theory model in which the agent's actions are multi‐dimensional to analyze the optimal weights to apply to performance measures in a compensation contract. We show how the optimal contract trades off the congruity of the overall performance measure with the desire to minimize the risk imposed upon the agent. In contrast to the single action case, we find that an increase in the sensitivity of a performance measure to an agent's action does not necessarily increase the weight placed on that performance measure, even if that measure is perfectly congruent with the firm's outcome.

This paper traces the development of archival, microeconomic-based, empirical income tax research in accounting over the last 15 years. The paper details three major areas of research: (i) the coordination of tax and non-tax factors, (ii) the effects of taxes on asset prices, and (iii) the taxation of multijurisdictional (international and interstate) commerce. Methodological concerns of particular interest to this field also are discussed. The paper concludes with a discussion of possible directions for future research.

Hedge fund strategies typically generate option-like returns. Linear-factor models using benchmark asset indices have difficulty explaining them. Following the suggestions in Glosten and Jagannathan (1994), this article shows how to model hedge fund returns by focusing on the popular "trend-following" strategy. We use lookback straddles to model trend-following strategies, and show that they can explain trend-following funds' returns better than standard asset indices. Though standard straddles lead to similar empirical results, lookback straddles are theoretically closer to the concept of trend following. Our model should be useful in the design of performance benchmarks for trend-following funds.

This paper considers why organizations use promotions, rather than just monetary bonuses, to motivate employees even though this may conflict with efficient assignment of employees to jobs. When performance is unverifiable, use of promotion reduces the incentive for managers to be affected by influence activities that would blunt the effectiveness of monetary bonuses. When employees are risk neutral, use of promotion for incentives need not distort assignments. When they are risk averse, it may—sufficient conditions for this are given. The distortion may be either to promote more employees than is efficient (the Peter Principle effect) or fewer. “Promotions serve two roles in an organization. First, they help assign people to the roles where they can best contribute to the organization's performance. Second, promotions serve as incentives and rewards.” (Milgrom and Roberts (1992, p. 364)) “Promotions are used as the primary incentive device in most organizations, including corporations, partnerships, and universities … This … is puzzling to us because promotion-based incentive schemes have many disadvantages and few advantages relative to bonus-based incentive schemes.” (Baker, Jensen and Murphy (1988, p. 600))

The Citicorp–Travelers Group merger increased the prospects for new legislation to remove the barriers between banking and insurance, resulting in a positive wealth effect for institutions most likely to gain from deregulation. Analysis of abnormal returns surrounding the merger show that life insurance companies and large banks (excluding Citicorp and Travelers Group) have significant stock price increases, while the returns of small banks, health insurers, and property/casualty insurers are insignificantly different from 0. This analysis provides evidence that investors expect large banks and insurance companies to receive significant benefits from recent congressional legislation removing barriers to bancassurance.

We analyze the influence of firm and managerial characteristics on executive compensation. Consistent with theory, we find monitoring difficulties result in greater use of options while CEO and blockholder ownership result in less. Risky investment is positively related to options and negatively related to cash bonus and restricted stock, suggesting that firms use options to encourage managers to take risks. We find a negative (positive) relation between options and leverage (convertible debt) consistent with minimizing the agency costs of debt. Finally, we provide new evidence on managerial horizon and incentives, documenting a concave relation between cash bonus and CEO age.

This study focuses on changes in incentives at the William E. Simon Graduate School of Business Administration in the early 1990s to redirect effort from academic research to classroom teaching. We find a substantial and almost immediate jump in teaching ratings following the changes in incentives. Longer-run learning and turnover effects are present. Evidence also suggests that research output fell. This case illustrates the power of organizational incentives to redirect effort in a multitask environment, even in the presence of apparent human–capital constraints.

Daily returns are used to examine how mutual funds actively alter the risk of their portfolios in response to past performance. Compared to monthly data, daily returns produce much more efficient estimates of fund volatility, which give vastly different inferences about the behavior of fund managers. In particular, monthly results consistent with under-performers increasing their risk relative to better performing funds disappear with daily data. The differences in the monthly and daily results arise from biases in the monthly volatility estimates attributable to daily return autocorrelation.

This paper examines the optimal structure of hierarchies when workers differ in the range of tasks they can perform. A hierarchical system may reduce costs by allowing most tasks to be handled by unskilled workers. This may however increase delay for those tasks which must pass through several layers before reaching the appropriate level. The paper characterises an optimal hierarchy when such a trade-off exists.

This article presents a simple yet powerful new approach for approximating the value of American options by simulation. The key to this approach is the use of least squares to estimate the conditional expected payoff to the optionholder from continuation. This makes this approach readily applicable in path-dependent and multifactor situations where traditional finite difference techniques cannot be used. We illustrate this technique with several realistic examples including valuing an option when the underlying asset follows a jump-diffusion process and valuing an American swaption in a 20-factor string model of the term structure.