John P. Daley
International Journal of Accounting, Banking and Finance, Volume 2, Issue 1, Pp. 45-69
Neoclassical price theory implies that the incentive effects produced by broad-based employee stock ownership compensation plans will be overwhelmed by the problem of free riding. Yet the use of such plans is relatively common. This paper seeks to explain this apparent dichotomy. Using the theories of the firm of Alchian and Demsetz (1972) and Demsetz (1983) and the analytical structure of Jensen and Meckling (1976), I develop a microeconomic rationale for the use of broad-based stock incentives in the presence of a central monitor. I show that the ability of stock to align owner and employee interests is a function of marginal monitoring costs. At the margin, when monitoring costs are large relative to their benefits, the value of shirking to employees is minute. Hence, the small gain promised by stock ownership is sufficient to motivate reduced shirking. The theory rigorously unifies much of the common litany of explanations for the efficacy of such plans: monitoring and information costs, employee self-selection, the small cost of changing behavior, and alignment of employee with employer interests. Two pairs of refutable implications are derived. First, the optimal level of individual employee ownership is negatively related to firm size and positively related to marginal monitoring costs. Second, the change in firm value attributable to employee stock ownership is positively related to both the level of individual employee ownership and marginal monitoring costs.
James R. Morris and John P. Daley
London: Chapman and Hall. 2009
A properly structured financial model can provide decision makers with a powerful planning tool that helps them identify the consequences of their decisions before they are put into practice. Introduction to Financial Models for Management and Planning enables professionals and students to learn how to develop and use computer-based models for financial planning. Providing critical tools for the financial toolbox, this volume shows how to use these tools to build successful models.
Placing a strong emphasis on the structure of models, the book focuses on developing models that are consistent with the theory of finance and, at the same time, are practical and usable. The authors introduce powerful tools that are imperative to the financial management of the operating business. These include interactive cash budgets and pro forma financial statements that balance even under the most extreme assumptions, valuation techniques, forecasting techniques that range from simple averages to time series methods, Monte Carlo simulation, linear programming, and optimization.
The tools of financial modeling can be used to solve the problems of planning the firm’s investment and financing decisions. These include evaluating capital projects, planning the financing mix for new investments, capital budgeting under capital constraints, optimal capital structure, cash budgeting, working capital management, mergers and acquisitions, and constructing efficient security portfolios.
While the primary emphasis is on models related to corporate financial management, the book also introduces readers to a variety of models related to security markets, stock and bond investments, portfolio management, and options.
This authoritative book supplies broad-based coverage and free access to @Risk software for Monte Carlo simulation, making it an indispensible text for professionals and students in financial management.