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ECON 6089 Problem Set #2 Module 5
发布时间：2024-06-01
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ECON 6089 Problem Set #2 Module 5
Due on April 29th 2024 before class
Some guidelines for submitting problem sets in this course:
● Please submit a PDF to Moodle as well as a hard copy in class
● Please include all of your team members name on the 1st page for grading purpose.
● For questions with quantitative answers, please bold or highlight your answers to make them easier to find.
● Please show your work. You do not need to show work for trivial calculations, but showing work is always allowed.
● For answers that involve a narrative response, please feel free to describe the key concept directly and briefly, if you can do so, and do not feel pressure to go on at length.
● Please ask questions about the problem set if you get stuck. Do not spend more than 10 minutes puzzling over what a problem means - it may just not be written clearly enough and may need to be clarified.
● Each problem below lists the number of points it is worth.
Problem 1: Shareholder Activism for Long-term Incentives [20 points]
Executive compensation schemes are a key tool used by public companies to align the incentives of firm leaders with that of their shareholders. For example, a shift towards long-term compensation would push incentives effort on creating long-term shareholder value. Over the past two decades, many companies have considered shareholder proposals to make executive compensation long-term focused. An example from Lucent Technologies is given below.
You are a significant shareholder of a public company and are worried about its management sacrificing long-term value for the benefit of short-term gains. You are therefore considering sponsoring a proposal to change the executive compensation scheme at the firm to provide better long-term incentives.
However, you are not sure if the rest of the market shares your viewpoint that changing executive compensation is a good thing for the firm.
To help you to figure out whether such a proposal might be a good idea, you ask your assistant to put together data on all similar proposals that had been voted on over the past ten years in any of the largest 5000 public companies listed in the U.S.
A week later your assistant returns with the following information:
- 524 votes occurred for this set of large public companies over this recent period
- The majority (64%) were voted down (i.e. got less than 50% vote share)
- The one-day percentage change in stock price in the first trading day after the vote – a key measure of the market view – was slightly lower on average for firms that had
proposals approved ( -0.89 %) than for firms that had proposals voted down (-0.85 %).
Based on these comparisons of average returns, your assistant concludes that the market in general does not think these proposals are good idea, but leaves you the dataset so that you can take a closer look.
You see that the data include four pieces of information:
1. Voting share, expressed as a percentage voting in favor
2. Whether the measure passed (i.e. if vote share was at least 50%)
3. The number of votes that ended up with a particular share (e.g., there was 1 vote that took place where 9% voted in favor).
4. The average returns to companies’ stocks the day after the vote (e.g., for the 2 votes that received vote shares of 21%, the average returns were 1.368%).
Please examine the data and write a short note describing your analysis and whether you think the market generally reacts positively or negatively (or not much at all) to shifting executive compensation to be more focused on the long-term. If you agree with your assistant, describe why. If you disagree, describe why you think your assistant is getting it wrong. Your answer should be a paragraph or two at most, but if you created any tables or figures in your analysis, please include them with your answer. [20 points]
Problem 2: Distributing your future riches [30 points]
Many years from now, with a successful career behind you, you find yourself in a position to begin donating your considerable fortune to charitable causes.
A non-profit called EduX approaches you to ask for a considerable donation. Their aim is to increase youth literacy with 1:1 after-school mentoring for children in first grade. You've heard good things about EduX from your former classmates and were impressed by the founder’s TedX Aspen talk. The founder writes you a personal email that, among various moving anecdotes and appeals to your ego, indicates that “everyone’s saying EduX’s data is the strongest, the very best, showing HUGE --just the biggest -- gains on children’s scores on standardized reading tests taken at the end of first grade.” Unperturbed by the founder’s anecdotes and bluster, you begin corresponding with the founder to understand the nature of this data about EduX’s impact.
Compose short replies to each of the statements below made by the founder, in simple language or with examples anyone would understand. Indicate why you are dissatisfied or satisfied with the founder’s statement and, when appropriate, help to correct the founder’s misunderstandings.
a. “When we compare the students in our program to students not in our program, the students in our program are much better readers.” [5 points]
b. “I see your point, but we’ve controlled for many, manythings, such as family income, the school students are in, etc.” [5 points]
c. “I have to admit, I’ve never got questions like this before. It sounds like you want us to run an experiment. But I don’t think that will work, because if we randomly assign a first grader to be eligible to our program, we can’t exactly force them to enroll.” [5 points]
d. “I see your point. But, we know parents also play a big role in whether students read well, and I don’t think your experiment would account for that since we don’t really have good measures of parental involvement.” [5 points]
e. “Ok, I’dbe willing to start an experiment. I have a daughter and a son (twins) who are both in different first grade classes in the same school. I’ll randomly select one class and invite the entire class to take part in our program. Then we can see how well that class reads (versus the other class) at the end of the year. Sound good?” [5 points]
f. “While I have you, one more thing. Yale recently did a randomized experiment on a similar
program. Not only did they find it was effective, they found that the effects were three times bigger on students who met with mentors in wealthier areas of their cities, relative to the effects on students who met with mentors in less wealthy areas of their cities. That made me think we should be busing students in poor areas into rich areas so that they can meet with their mentors there, as the Yale study shows that meeting with mentors in rich areas is much more effective. Would you be willing to give us a gift to fund that transportation? It’s much cheaper than the cost of a mentor, and the Yale research suggests it would triple our impact.” [5 points]
