Lucian (Luke) Taylor

Assistant Professor
Department of Finance
Wharton School, University of Pennsylvania

Email: luket@wharton.upenn.edu
Phone: (215) 898-4802

[curriculum vitae]  

Recent Work

CEO Pay and CEO Power: Evidence from a Dynamic Learning Model
(Revised November 13, 2009)

If CEOs have considerable power over their own compensation, then we expect them to avoid pay cuts following bad news about their ability, and win large pay raises following good news. Contrary to this view, I find that CEOs capture only 20-33% of the surplus resulting from good news, and they bear 8-20% of the negative surplus resulting from bad news. These estimates are from a model in which agents learn gradually about CEO ability, and CEOs' bargaining power determines how their compensation responds to news about ability. I estimate the model's parameters by applying GMM to data on stock returns and changes in CEO pay. Since CEOs do not capture their full surplus, CEO ability matters more for shareholders, which is supported by predictions and data on unanticipated CEO deaths. The model helps explain the sensitivity of CEO pay to lagged stock returns, and also the changes in stock return volatility around CEO successions.
Technical Appendix


Why are CEOs Rarely Fired? Evidence from Structural Estimation
(Revised October 26, 2009)

I evaluate the forced CEO turnover rate and quantify effects on shareholder value by estimating a dynamic model. The model features costly turnover and learning about CEO ability. To fit the observed forced turnover rate, the model needs the average board of directors to behave as if replacing the CEO costs shareholders at least $200 million. This cost mainly reflects CEO entrenchment rather than a real cost to shareholders. The model predicts shareholder value would rise 3% if we eliminated this perceived turnover cost, all else equal. In addition, the model helps explain the relation between CEO firings, tenure, and profitability.
Technical Appendix



Entrepreneurial Learning, the IPO Decision, and the Post-IPO Drop in Profitability
(with Lubos Pastor and Pietro Veronesi)
Forthcoming, The Review of Financial Studies (accepted 11/21/2007)

We develop a model of the optimal IPO decision in the presence of learning about the average profitability of a private firm. The entrepreneur trades off diversification benefits of going public against benefits of private control. Going public is optimal when the firm's expected future profitability is suffciently high. The model predicts that firm profitability should decline after the IPO, on average, and that this decline should be larger for firms with more volatile profitability and firms with less uncertain average profitability. These predictions are supported empirically in a sample of 7,183 IPOs in the United States between 1975 and 2004.
Technical Appendix