Essays on corporate finance and employee compensation
Thompson, Mary Elizabeth
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This dissertation comprises three independent essays that address contemporary issues in corporate finance and employee compensation to understand the role of pensions in corporations as well as the causes and consequences of various pension plan decisions. The first essay explores the decline in Employee Stock Ownership Plan (ESOP) incidence. I identify determinants of ESOP terminations and test the associated hypotheses on a sample of publicly-traded firms from 1992-2007. I find that firms terminate plans because they impose investment risk upon participants and introduce a tension between non-executive and executive equity-based compensation. Additionally, firms with substitute employee ownership plans are more likely to terminate their ESOP. The results highlight the dangers of the unique diversification exemptions associated with ESOPs and suggest a relation between executive compensation and non-executive compensation. In the second essay, I address whether the incentives of top executives influence the type of pension plan offered to non-executive employees. The contribution requirements and relative risk of a firm’s pension plans impact its value, and when a firm adopts a defined contribution plan its operating flexibility rises and cash flow variability falls, ultimately increasing firm value. In firms using executive equity pay, pension decisions therefore impact executive wealth, and executives benefit from this action. I examine the link between the two pay types in a sample of publicly-traded firms from 1992-2007 and find that executive compensation does affect a firm’s pension choice. The results point to the need to examine the different compensation structures within a firm as interrelated rather than isolated. In the third essay, I examine the origin and development of corporate pension plan provision in the US. I define each pension plan type, explore their characteristics and provide statistics detailing their incidence. I compare and contrast defined benefit and defined contribution plans and explore the popularity shift from DB to DC plans as well as the more contemporary growth of hybrid plan use. I also explore the trends that shaped pension provision and their drivers as well, and I use the analysis explored in this paper to make predictions about the future of the pension marketplace.