Tag: Cox School of Business

Culture, Society & Family Economics & Statistics

A director’s skills, experiences and workload drive their compensation, study finds

Post author By Margaret Allen
Post date December 17, 2013

The average director is 61 years old; 15 percent are female, 68 percent have an undergraduate degree, 50 percent have an advanced degree, 27 percent have an MBA.

Mystique shrouds the activities surrounding the board of directors. Today directors serving on boards are paid quite handsomely. But what functions do they perform for their rewards? In a first-of-its-kind paper, SMU Cox Distinguished Finance Professor James Linck, with Viktar Fedaseyeu and Hannes Wagner, analyze directors — who they are, what they do and how much they are paid.

Many believed that the board of directors was an ‘old boys network.’ As far back as the early ’90s, research indicated the ‘appearance’ of an old boys network, notes Linck. This earlier research indicated that directors were largely paid the same and rarely received equity as compensation as is common today.

“But at some point in the ’90s, this started to change,” says Linck. “Regulation was not the only culprit. For example, the Sarbanes-Oxley regulations and contemporary changes to the rules on the major stock exchanges were what some institutions were also trying to push companies to do. In general, it seems as though the importance of, and certainly the focus on, the board of directors has increased over time.”

In the past, there was a perception that outside directors are paid little and all paid the same, but this is no longer true. The authors find that “compensation of outside board members is substantial and varies significantly across board members, even within the same firm.”

The average compensation for a directorship rose from $70,000 in 1995, to $164,300 in 2006 and $188,600 in 2010.

In 2006, the SEC adopted Rule 33-8732a, which required public companies to disclose compensation of outside board members similar to the disclosure requirements for executive compensation.

“After the shocks to the financial system and post-Sarbanes Oxley (SOX) regulation, directors were being sued more,” Linck says. “Firms were relying on their boards more than in the past — holding them responsible and accountable.” Linck suggests that this inspired numerous research undertakings to understand what directors do, and what drives board structure.

What they found
The researchers put together a data set of more than 57,000 board positions from 2006 to 2010. Directors in their sample hold an average 1.2 outside directorships in S&P 1,500 firms.

The average compensation that a director receives for all his/her outside directorships in S&P 1,500 firms is $220,600 per year; average compensation per directorship is about $180,000.

Variation across individual directors is high, even within the same firm. Within the same board, the difference between the highest and lowest paid director on a board averages $186,000.

The research unpacks the characteristics of directors
The average director in the sample is 61 years old, and 15 percent are female, according to findings. Sixty-eight percent of the directors in the sample have an undergraduate degree, 50 percent have an advanced degree, 27 percent of which have an MBA.

The following types of expertise were found among directors in the sample:

53 percent have finance experience and 8 percent are CPAs;
Those with military experience hold 6 percent of directorships;
Individuals with political experience hold 4 percent of directorships;
Academics secured 11 percent of board seats;
Those with legal or consulting experience hold 15 percent of positions;
Individuals with executive experience, including past or present executive positions, and current and retired CEOs, hold 28 percent of directorships.

Certain types of connections may be perceived as influencing the choice of directors. However, the influence of personal relationships — such as an Ivy League connection, grey director status and family connections — were not significant.

Contrary to expectations, political experience was not associated with higher compensation, on average.

Drivers of compensation
Research findings suggest that a director’s skills, experiences and workload are the primary drivers of their compensation.

“Workload is a key driver of director compensation. For example, it’s a particularly large amount of work to chair an audit committee, specific expertise is required to hold that position, and directors serving that role receive significantly higher compensation, Linck says. “The variance of workload driven by the various role’s board members hold contributes to the variance in compensation across directors.”

Supply and demand should determine director compensation. The supply of directors should be based on the workload associated with being a director, and the value of a director’s experience and qualifications. The demand for directors depends on the firm’s needs for monitoring and advising top management.

The authors found that director qualifications also increase compensation. For example, those with legal and consulting experience have 8 percent higher compensation, while those with executive experience receive 11 percent more. Other qualifications such as having academic or finance experience also increase compensation.

In earlier work, Linck documented that larger and more complex firms have larger boards. Hence, size and complexity should increase the demand for outside directors.

“Google needs a different board of directors than ExxonMobil or Citi,” Linck mentions. He notes that firm size always matters in finance. There is also ‘evidence that top directors are attracted to largest firms,’ as noted in earlier research. These directors are therefore paid more.

Serving on a board is more demanding than in times past.

“The directors serving on boards today work, are often ‘on call’” states Linck. The potential liability placed with directors today has elevated the demands and risks of the role — and corresponding to the workload —increased compensation as well.

The paper “The Determinants of Director Compensation” by James Linck of Cox School of Business, Southern Methodist University, and Viktar Fedaseyeu and Hannes F. Wagner of Bocconi University is under review. It has been published in the working papers series by the Social Science Research Network. — Jennifer Warren

SMU is a nationally ranked private university in Dallas founded 100 years ago. Today, SMU enrolls nearly 11,000 students who benefit from the academic opportunities and international reach of seven degree-granting schools. For more information see www.smu.edu.

SMU has an uplink facility located on campus for live TV, radio, or online interviews. To speak with an SMU expert or book an SMU guest in the studio, call SMU News & Communications at 214-768-7650.

Tags Cox School of Business, James Linck

Economics & Statistics Researcher news

Analysis: Corporate America’s cash pile-up a reaction to refinancing risk

Post author By Margaret Allen
Post date August 2, 2013

Cash is a hedge for firms in case they cannot raise the funds they may need if credit conditions are tight or another type of shock hits

Why has corporate America been awash in record levels of cash? Numerous theories are offered as to why firms amass: Firms themselves are riskier, volatile, pessimistic and have record profits, to name a few.

But an overlooked reason, according to new research by SMU Cox Rauscher Chair William Maxwell and co-authors Jarrad Harford and Sandy Klasa, is that firms are holding more cash on their balance sheets because of refinancing risk. Cash is a hedge for firms in case they cannot raise the funds they may need if credit conditions are tight or another type of shock hits.

The authors’ paper “Refinancing Risk and Cash Holdings” is forthcoming in the Journal of Finance.

U.S. firms’ long-term debt maturities have shortened. The authors indicate that the typical firm in 2008 with long-term debt had 66.3 percent more long-term debt due within three years than the same firm in 1980, the period of the study. In other words, firms are needing to roll over their debt sooner than in previous decades, which presents the risk that they cannot access capital markets to finance their activities. Numerous firms experienced exactly that phenomenon post-financial crisis.

According to Maxwell, firms are holding more cash because of the way in which they access capital. “If you are a B credit-rated firm, you can get a 10-year note or loan, versus an A-rated firm receiving a 20- to 30-year note. In finance, when a balloon loan or bond is coming due, it is called a bullet,” Maxwell explains. “In 10 years time, when the ‘bullet’ is coming due, what happens if you cannot refinance? If capital markets turn against you, you’re done. The A-rated firm rolls over its debt regularly. The smaller, B-rated firm does not have this capacity.” This is how refinancing risk manifests.

Today bank loans and notes to firms have shorter maturities, which offer more potential for refinancing risk. So firms have been changing their policies on cash to manage this risk. They stash. “If a firm gets caught in a bad cycle or shock, it is not the face amounts or percentage of debt you have outstanding that matters, it is a function of when the repayment is coming due,” says Maxwell. Average bond maturities for U.S. corporations during the time period 1985 to 1989 was 16.6 years, reducing to 11.3 years from 2005 to 2008. Similarly, the average bank loan or note maturity over the same periods went from 5 years to 3.8 years. The demand and supply-side of money are all intertwined, notes Maxwell.

Market is watching
According to the research, the market rewards the firm holding ample cash with shorter maturity debt through higher valuation, particularly when credit markets are tight. The firm that invests wisely also gets market approval. Firms have to hold cash for the right reasons though. According to Standard & Poor’s Capital IQ, 202 firms of the S&P 500-stock index have $1 billion or more in cash. There are record levels of firms in this billionaires club and record amounts amassed versus decades past.

There are good and bad reasons for holding cash, says Maxwell. For example, what if there is an economic downturn, and a firm needs to make a $1 billion capital investment every year. The BB-rated firm may not be able to access capital markets during or after an economic shock. Consider the case of two firms. One has cash because it refinanced a year before a shock; one does not. The firm with liquidity can make investments. Maxwell alludes to an analogy of the internationally competitive bicycle race the Tour de France: “When do competitors separate themselves? When they are peddling uphill. Firms also use headwinds or hard times to separate themselves from the pack.”

Getting Wisdom
Firms did wise up since the last crisis by amassing cash. However some investors are pushing back. “The practice has become extreme in cases like Apple, with excessive cash on the balance sheet,” says Maxwell. “They do not need so much cash to fund their operations and invest in opportunities.” The financial crisis impacted firms’ psyches similar to individuals’ psyches and pocketbooks. “We all think differently than we did before the financial crisis,” he says. “Everyone is putting more cash away.”

Given that firms are more flush these days, how and when should they spend it? To this question Maxwell responds: “Cash should be used as a hedge in a rainy day. Most firms did learn this lesson from the recent financial crisis. You do not go bankrupt because your net income is negative; you head for bankruptcy when you cannot pay your bills. Liquidity helps pay the bills and allows firms to take advantage of opportunities. If some calamity hits — and in general they do every 5 years to 7 years — the firm can weather the headwinds.”

Maxwell describes current credit conditions as never-before loose. “If you can raise money now, do it,” he concludes. “It is ridiculously cheap money. The QE (quantitative easing) programs are like a huge binge — with firms drinking shot after shot of cheap money. It is not like a glass of wine with dinner; these are tequila shots.” It may feel great when you are doing it, but then tomorrow comes.

Co-author Jarrad Harford is at the University of Washington and Sandy Klasa is at the University of Arizona. — Jennifer Warren

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For more information, www.smuresearch.com.

SMU is a nationally ranked private university in Dallas founded 100 years ago. Today, SMU enrolls nearly 11,000 students who benefit from the academic opportunities and international reach of seven degree-granting schools. For more information see www.smu.edu.

Tags Cox School of Business, William F. Maxwell

Culture, Society & Family Mind & Brain Researcher news

The Undying Radio: Familiarity breeds content when it comes to listeners and music

Post author By Margaret Allen
Post date July 29, 2013

Study shows that when offered the choice, listeners opt for familiar tunes, despite belief people prefer constant novelty

Are you tired of hearing Taylor Swift’s familiar “You Belong with Me” played over and over again? Or are you part of the cool set of music listeners, identifying the next great hit or indie band on the rise? Many music listeners, especially the younger generations, want to perceive themselves as listening to cool music. But new research says otherwise when it comes to real choices, says SMU’s Morgan Ward, an assistant professor of marketing in the Cox School of Business.

The tension between the novel and the familiar leads to interesting insights for marketers. The research offers lessons about how actual behavior trumps media portrayals of consumers’ perennial desire for the novel.

Many have this intuition that people are driven toward novelty, says Ward, a co-author of the study. “We believe we want to listen to new music, or anything that is novel, but when we observe what people actually choose, they tend to choose what is familiar.” There is a persistent tension in music choice between the opposing forces of the known and familiar versus the novel and new, write the authors. People do exhibit both tendencies in their consumption choices. But there is little research examining which force will dominate.

The research indicates that our behavior trumps what the media portrays.

“In life we have many day-to-day decisions and responsibilities,” Ward says. “We are sorting through so much information; and at the end of the day, we are ‘cognitive misers.’ That is, we do not want to spend so much time on making choices, which is very depleting. Research backs this up. Choosing something familiar is easy to process and comfortable. The desire to not expend so much energy on choices is what I believe drives these findings.”

Ward co-authored “The Same Old Song: The Power of Familiarity in Music Choice” with Joseph Goodman of Washington University, and Julie Irwin of University of Texas, Austin. It appears in Marketing Letters, including online.

Play on
The music industry is over $30 billion dollars strong. Web radio now exceeds 57 million consumers each week. Traditional radio formats continue to endure, despite cries that radio is dead. According to Radio Advertising Bureau, in 2011 radio reached nearly 95 percent of the U.S. population, and U.S. radio advertising netted $17.4 billion in revenues. The authors suggest offering and emphasizing songs consumers want is good marketing strategy, as is choosing to advertise in venues that play preferred music.

“People were under the impression that radio was no longer relevant,” notes Ward. “Radio is very relevant. We now have new forms of music on popular websites like Pandora and Spotify, where these brands are already maximizing insights such as ours. They present the consumer with music they already like but it is presented in new ways that allow for an easy transition. These sites are successful because they are using the idea of familiarity.”

Across four studies, findings indicate that familiarity is a stronger predictor of music choice than other prevalent measures such as liking and satiation. Consumers pick music that they are familiar with even when they believe they would prefer less familiar music. This research is a first to quantify the effect of familiarity versus other forces — including liking — on consumer choice and to determine the power of these variables on actual market behavior. The authors note that an extensive body of psychology literature “does not provide much actionable managerial guidance for marketers as to which stimulus a consumer will actually choose in a particular product category.”

The authors’ second test shows that people are likely to choose music based on familiarity, even when they will have to actually listen to the music versus an intent. In fact, familiarity predicts choice above and beyond liking, and it has a stronger direct effect on choice. “Liking” is a commonly used variable in marketing research. Especially in the music domain, perceived coolness is a factor. Ward mentions, “We measure this by having respondents make choices individually; if they had their peers observing their choices, they might have chosen differently, trying to make cool choices in front of their peers.”

A heavy load?
Also factored into the study is one’s stimulation levels and cognitive load. For example, the authors predict and prove that when a person is engaged in an activity requiring more stimulation, they prefer more familiar music. Imagine someone jogging or driving in rush-hour traffic, two tasks which already consume some of the listener’s bandwidth. The opposite is also true: in a less stimulating environment, the novel can be better handled. Blaring some new tune while outdoors playing Frisbee with your black Lab is perfectly doable. One’s “cognitive load” is particularly relevant to music choice because listening to music often involves other activities such as driving, exercising or working with “audio wallpaper” playing softly in the background.

A general finding is that consumers do not want to be over-stimulated, says Ward. Optimal stimulation has been researched since the 1980s. “People typically operate at a low level of desire for stimulation in their everyday surroundings or they seek it at certain times. There are people who like jumping out of airplanes and scaling cliffs in Nepal, but this is more of a chronic state of being versus a consumption choice.”

Familiarity however is a major driver of actual music choice and market share, according to results. They note that emphasis on novelty in the music domain, by consumers and people protesting the current state of the music business, is misplaced. While consumers indicate that they want more novelty, in fact their choices suggest that they do not.

Impact on the playlist
When testing consumers about a particular music choice or a particular playlist, marketers would do well to bypass consumers’ notions of what they want, and instead ask how familiar consumers are with the music, the research indicates. Familiarity is as powerful, and sometimes more powerful, than any other measure of music preference in the studies. “Satiation measures,” how tired of a song one is, at least for predicting reduced preference for music, is counterproductive.

For music outlets with playlists, findings suggest the best strategy is to concentrate on familiar songs, even if consumers say they want more novelty. When a new song is introduced, the authors suggest it should be played often and be offered to consumers through promotions. For music platforms allowing users to create a playlist, such as iTunes, marketers should heavily promote and make familiar music, easy to find for purchase, and should not emphasize unfamiliar music. The researchers predict the success of Apps such as Spotify and Pandora, which offer newly released music that has many familiar elements, such as familiar artists, styles, and melodies.

The authors believe that this familiarity story would play a powerful role in other artistic categories other than music, such as the entertainment, food and the visual arts. Many popular movies include familiar actors and plots, and same goes for popular restaurants seeming to serve essentially the same food. The researchers point to people not needing stimulation in these types of product categories, as in music.

The Eagles, Rolling Stones, Cold Play and Taylor Swift may yet live on another century. — Jennifer Warren

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Tags Cox School of Business, Morgan Ward

Culture, Society & Family Economics & Statistics Researcher news

SMU-North Texas Food Bank study will analyze causes of hunger in Dallas and rural North Texas

Post author By Margaret Allen
Post date November 6, 2012

SMU with The Hunger Center of North Texas will look at the impact of social networks and social capital

Economics researchers at SMU will analyze the roles social networks and isolation play in fighting hunger in North Texas.

Recent studies have found that household economic resources are not the only factor contributing to food insecurity, according to SMU economist Thomas B. Fomby.

About 1 in 6 U.S. households are affected by food insecurity, meaning there’s not enough food at all times to sustain active, healthy lives for all family members, according to the U.S. Department of Agriculture.

Reidus hilli, John Graf, SMU, coelacanth, Dipluridae,

“This study will analyze the role of other factors causing food insecurity, such as urban or rural settings, access to nutrition assistance programs, access to inexpensive groceries, family support and social stigma,” Fomby said.

Fomby, professor of economics and director of the Richard B. Johnson Center for Economic Studies, and Daniel Millimet, SMU professor of economics, are conducting the study. A $120,000 grant from the North Texas Food Bank is funding the research. The study will be complete in March 2014.

Household income a powerful predictor, but social networks play role
Although household income is the single most powerful predictor of food security, poverty and hunger are not synonymous. According to Feeding America, 28 percent of food insecure residents in Dallas County are ineligible for most nutrition assistance programs because they have incomes above 185 percent of the federal poverty level; and the U. S. Department of Agriculture reports that 58.9 percent of U.S. households with incomes below the poverty level are food secure. The reasons for this are not well understood.

“With this research, we expect to better understand the causes of food insecurity in North Texas and improve the assessment of at-risk households,” Fomby said.

The SMU study is one of two major research projects launching The Hunger Center of North Texas, a new collaborative research initiative created by the North Texas Food Bank. The University of North Texas is also collaborating on a study.

The studies will focus on the impact that “social networks” and “social capital” have on household food security. The central questions are:

How do social relationships and community conditions make it easier (or harder) for low-income households to keep healthy food on the table?
How do these social and community influences differ in the City of Dallas and rural areas of North Texas?

Groundbreaking research may help leverage social forces to reduce food assistance
“We believe that this research will be groundbreaking,” said Richard Amory, director of research for the North Texas Food Bank. “Nutrition assistance programs tend to approach individuals and households in isolation. Understanding the role that communities play in food security may help us leverage social forces to develop more effective programs and, ultimately, reduce the need for food assistance.”

The studies will start to shed some light on issues related to hunger in the community, said Kimberly Aaron, vice president of Policy, Programs and Research for the North Texas Food Bank.

“In performing our due diligence on existing research, while forming The Hunger Center, it became clear that many factors related to food insecurity are not well understood,” Aaron said.

SMU and the North Texas Food Bank recently formed a partnership, “Stampede Against Hunger,” to build on SMU’s strong support for NTFB, connecting campus groups already working with the food bank, as well as encouraging new types of participation for the campus and alumni community.

SMU support for the food bank has ranged from traditional food drives and volunteer work in the NTFB distribution center, to research for the food bank conducted by students in the Cox School of Business and the Bobby B. Lyle School of Engineering. Faculty and students from the Annette Caldwell Simmons School of Education and Human Development volunteer regularly in NTFB nutrition courses and Fondren Library staff organize a “Food for Fines” drive each year, waiving library fines in exchange for donations of non-perishable food items.

Fomby and Millimet are in the SMU Department of Economics in Dedman College. — Nancy George, and the NTFB

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Tags Annette Caldwell Simmons School of Education and Human Development, Bobby B. Lyle School of Engineering, Cox School of Business, Daniel L. Millimet, Dedman College, Fondren Library, Richard B. Johnson Center for Economic Studies, SMU Department of Economics, Thomas B. Fomby

Culture, Society & Family Economics & Statistics Researcher news SMU In The News

CNN: Study links mutual fund decisions with religion

Post author By Margaret Allen
Post date September 25, 2012

Predominant religion in a community affects the decision-making process of mutual fund managers in that community

CNN’s “Belief” blog covered the research of SMU financial economist Johan Sulaeman. In the Sept. 25 article “Study links mutual fund decisions with religion,” CNN journalist Laura Koran reported on research by Sulaeman and others who found that religion plays a major role in many Americans’ lives, including their investing.

“Specifically, the study found that mutual funds located in predominantly Catholic areas are associated with increasing fund volatility, a measure of risk taking, by about 6 percent, compared to those in low-Catholic areas. Those in predominately Protestant counties have a 14 percent lower fund volatility compared with those in low-Protestant areas.”

Sulaemann is an assistant professor of finance in the Cox School of Business.

Read the full story.

EXCERPT:

By Laura Koran
CNN

Faith plays a major role in many Americans’ lives, affecting their outlook on morality, politics and even – according to a new study – investing.

The study, conducted at the University of Georgia and Southern Methodist University, found that the predominant religion in a community affects the decision-making process of mutual fund managers in that community, specifically when it comes to risk.

Mutual funds in counties with larger Catholic communities tend to embrace risk more than those in majority-Protestant counties, the study found. Earlier studies have found that Catholics are generally more prone to take speculative risks than the average population, while Protestants are more risk-averse than the average population.

The findings, which will be published next month in the academic journal Management Science, could help provoke a re-evaluation of how investing works, its authors said.

“One would expect that with very, very severe competition within the mutual fund industry, culture should play no role in mutual fund decisions because fund managers … should adopt value-maximizing strategies,” said Tao Shu, an assistant professor of finance at the University of Georgia and one of the study’s authors.

SMU has an uplink facility located on campus for live TV, radio, or online interviews. To speak with Metin Eren or book him in the studio, call SMU News & Communications at 214-768-7650.

“Surprisingly,” Shu continued, “we found that despite the very intense competition within the mutual fund industry, mutual funds are still impacted by local culture.”

Specifically, the study found that mutual funds located in predominantly Catholic areas are associated with increasing fund volatility, a measure of risk taking, by about 6%, compared to those in low-Catholic areas. Those in predominately Protestant counties have a 14% lower fund volatility compared with those in low-Protestant areas.

The study looked at 1,621 growth and aggressive growth mutual funds.

Shu conducted the study with University of Georgia colleague Eric Yeung and Johan Sulaeman of Southern Methodist University.

Read the full story.

SMU is a private university in Dallas where nearly 11,000 students benefit from the national opportunities and international reach of SMU’s seven degree-granting schools. For more information see www.smuresearch.com. Follow SMU Research on Twitter, @smuresearch.

Tags Cox School of Business, Johan Sulaeman

The average director is 61 years old; 15 percent are female, 68 percent have an undergraduate degree, 50 percent have an advanced degree, 27 percent have an MBA.

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