|Dr. Stacey Jacobsen is a recent graduate of the IU Kelley School of Business.|
IU Kelley School of Business, Department of Finance
Recently graduated doctoral student Stacey Jacobsen from the IU Kelley School of Business, Department of Finance, investigated the private incentives of Chief Executive Officers (CEOs), showing that the market attaches a high value to CEOs who restrain from activities that increase their private benefits.
After graduating with an undergraduate degree from Texas Christian University in Ft Worth, Texas, Dr. Jacobsen worked at an investment bank where she was involved with corporate finance activities such as mergers, acquisitions and IPOs.
“The president of the investment banking division was very interested in financial research and pushed the analysts to read academic literature, which is kind of unusual for practitioners because usually only academics read academic literature,” she said. “But I knew at some point in my career, to get to the next step in the corporate world, I was going to have to get an MBA or go to school in some form. By then I’d become interested in the research, so I gave in and decided to get a Ph.D. after years of swearing I wouldn’t.”
Dr. Jacobsen came to IU specifically to work with Dr. Utpal Bhattacharya, who became her advisor and chair of her research committee. “He believes you should ask interesting, important questions that are relevant beyond academia—issues that we care about in our everyday lives,” she said. “I thought that was something neat.”
“His test for an interesting research question is ‘Tell your mom the idea, and if she doesn’t understand it or she doesn’t find it interesting then it’s a bad idea. Do the same with your grandma and so on.’ And because of that his research is cited often and it’s always exciting,” she said.
The idea for Dr. Jacobsen’s dissertation came from her coursework and her corporate experience.
“[In business school,] you take these corporate finance classes and most of the research assumes that managers and CEOs are all homogenous. They’re basically robots. If you give two CEOs the same compensation contract, and the same monitoring by the board of directors and shareholders, they’ll always make the same decisions. Very little research has considered the idea that these CEOs have idiosyncrasies that might affect their decision making,” Dr. Jacobsen said.
“So I thought back to my days in investment banking and working on corporate finance, and my experience that you came across very different personalities in CEOs. Some of these guys had huge egos, whereas others were very cautious—maybe they grew up in the Depression—and others were always thinking about ethical and moral consequences.”
“I started to wonder if these idiosyncrasies mattered in terms of a corporate finance setting. Do investors care about these idiosyncratic incentives? Do they value that information? We talk in finance about things we can incentivize CEOs with, like compensation contracts, which we can monitor and control, but there are characteristics that can’t be controlled that will affect how a CEO makes decisions.”
Dr. Jacobsen looked at CEOs who cancel acquisition deals, or mergers, because they are too expensive. CEOs have incentives to complete these acquisitions, she said, because their pay is directly tied to the size of the firm. Each time a CEO completes a merger, s/he increases the size of the firm and thus the CEO’s compensation.
“So, it tells us something very valuable about the CEO that is willing to forgo this and cancel a deal because it’s bad for shareholders. [Looking at these canceled deals] allows me to disentangle one very specific idiosyncratic incentive, which I call ‘restraint’ or ‘discipline.’” A CEO shows ‘restraint’ by canceling a deal, she said.
To understand if the market values this characteristic she does two tests.
First, Dr. Jacobsen looks at the capital market response, or how the stock market reacts to the announcement of the cancellation. She found a significant increase in the firm's share price in the days surrounding the cancellation announcement.
Second, she looks at the labor market perspective. Dr. Jacobsen found that CEOs who show ‘restraint’ have better career prospects. These CEOs are significantly less likely to be fired and more likely to move onto better jobs, meaning they are more likely to become CEOs at bigger public firms.
Bad CEOs would have done the deal even if it was expensive, Dr. Jacobsen said.
“I think it’s interesting because in the last ten years everyone has been seeing these revelations of CEOs committing fraud, or going to jail or paying themselves too much. So this is a nice revelation of a CEO doing something good, something right,” she said.
She begins as an Assistant Professor of Finance at the Cox School of Business at Southern Methodist University this month.
Erika Lee, Director of Communications, The University Graduate School, firstname.lastname@example.org
Anna Saraceno, The IU Graduate and Professional Student Organization, email@example.com
The Graduate and Professional Student Organization and the University Graduate School would like to congratulate Stacey Jacobsen on receiving the GPSO/UGS Recognition Award. Students selected for this award were nominated by a faculty member from within their department, and selected by the GPSO and UGS for excellence in their graduate studies at Indiana University.