Over the last two decades, the share of corporate executives holding political office in the United States increased substantially, which resulted in large benefits for their firms and shifted the balance of power toward corporate interests

On November 8, 2016 Donald Trump won the U.S. Presidency. While his election was unusual in many respects, Trump is just one of several recent examples of corporate executives running for political office. William Harrison Binnie, a former CEO of Carlisle Plastics, Inc., unsuccessfully ran for the U.S. Senate in 2010. In 2000, Jon Corzine, a former CEO of Goldman Sachs, was elected U.S. Senator, and in 2005 became the governor of New Jersey. These examples are far from isolated. In fact, the share of federal office holders (i.e., U.S. Congressmen, Senators, and Presidents/Vice-Presidents) who had executive experience prior to being elected remained relatively flat at around 13-14% between 1980 and 2000 but then increased rather sharply to more than 21% by 2014. Why do so many executives make the switch from a career in business and run for political office? Further, how does the increase in executives’ political participation affect their firms and the legislative agenda in the United States more generally? In a new working paper, we investigate these questions by studying the incidence of corporate executives running in U.S. federal elections between 1980 and 2014.

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Do CEOs affect political choices of their employees? Using a large sample of U.S. firms, we find evidence that they do. First, we document that employees donate significantly more money to CEO-supported political candidates than to otherwise similar candidates not supported by the CEO. In 2012, for example, Barack Obama raised three times more money from employees of firms whose CEOs donated to him than from employees of firms whose CEOs donated to Mitt Romney (see Figure). We find similar effects for all federal elections (House, Senate, and President). Second, we find that employees located in congressional districts where CEOs support political candidates are more likely to vote in elections, suggesting that CEOs can affect not only their employees’ campaign contributions but also voter turnout.

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Employee stock options (ESOs) represent an integral component of modern employee compensation packages, particularly for highly innovative firms and those that operate in the high-tech industry (see e.g., Core and Guay (2001), Ittner et al. (2003), and Chang et al. (2015)). However, these types of firms also make attractive acquisition targets, and the natural question arises as to what happens to ESOs held by rank-and-file employees once their firms get acquired.

Using data from merger agreements on 1,178 deals announced during 2006-2014, we find that ESOs compensation is modified by acquirers in a way that does not benefit employees. In more than 80% of all completed M&A deals, some of the target’s outstanding employee stock options are simply terminated by the acquirer. While the most common scenario is cancelling all out-of-the-money stock options of the target firm, even in-the-money stock options can sometimes be terminated without any compensating payment to employees, and vested and unvested stock options can all be fair game. For example, when Microsoft was buying Skype in 2011, employees were not even able to keep the vested portion of their stock options.

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In my forthcoming Journal of Finance paper, Share Repurchases and Pay-Performance Sensitivity of Employee Compensation Contracts, I explore how share repurchases affect existing employee compensation contracts and offer a new explanation for the popularity of stock buybacks. Specifically, at the time of a share repurchase, employees are not permitted to tender their unvested shares, and the pay-performance sensitivity of their contracts increases. This increased employee ownership (measured by the dollar change in compensation per dollar change in firm value) creates stronger incentives for employees to provide effort, but also exposes them to greater risk. For example, a repurchase of 7% of common shares provides a 7.5% increase in employee incentives and can substitute for about half of a typical annual equity grant. Given the incentive effect of stock buybacks, managers (who make payout decisions) can benefit from stock repurchases by effectively forcing higher incentives on employees (who do not influence the firm’s payout policy).

Using a sample of 1,295 open market repurchase announcements and hand-collected data on employee stock option programs over the 1996 to 2002 period, I find that announcement returns are larger in firms with larger repurchase programs and many unvested stock options. The effect is most powerful when employees (not managers) have large amounts of unvested ownership and when firms intensively use human capital. In addition, I find that the method of payout chosen by the firm (stock repurchase versus dividend increase) is affected by the compensation structure at the firm. I find that repurchases are more likely to be announced when employees hold many unvested stock options, particularly when firms have a greater need for human capital, as measured by their R&D expenses and Tobin’s Q. Consistent with the diversification motive of risk-averse employees, I find that stock option exercises are positively related to the fraction of repurchased equity. A one-standard deviation increase in the fraction of repurchased equity is associated with a 30% increase in stock option exercises by managers and a 19% increase by employees, controlling for factors such as stock returns, market-to-strike ratios, and contemporaneous option grants, among others. The increase in stock option exercises is more pronounced for firms with highly volatile stock returns, supporting the view that employees exercise their stock options because of the increased risk exposure.

The rationale for open market share repurchases proposed in this paper is unrelated to the undervaluation and excess cash distribution motives explored elsewhere in the payout literature. While my empirical and theoretical results do not rule out undervaluation or other repurchase motives, the argument of this paper is that managers also repurchase stock to boost employee incentives.

The full paper is available for download here.