Ajay Patel
Practicing Practicality

Broadly speaking, Ajay Patel’s research for the past three decades has focused on corporate decision-making. As he explains: “Why have people made certain decisions? What are the incentives behind those decisions? What was the information content of those decisions?” 

But whether examining cross-border mergers and acquisitions, the impact of security offerings on valuations and firm performance, or factors affecting CEO compensation, Patel wants all his work to have practical value.

“When I first started,” he says, “some of my research ideas came from students in the evening MBA program because they forced me to ask myself, ‘Why am I doing this research? Who cares about this? Will this research be of any use to these students in their careers?’ 

“I decided if the answer was ‘no,’ I wasn’t going to do that research anymore,” continues Patel, who is the Thomas S. Goho Chair in Finance at the School of Business. “I think teaching in the MBA program made me a better academic because it forced me to think about what’s important and what’s not, what has practical value and what doesn’t. I’ve always brought my research into the classroom, even if it was just a working paper, to gauge students’ responses. If they said it was interesting, I knew I was probably adding value.”

Patel joined the faculty in 1993. In addition to his teaching and research, he has held a number of administrative roles, most recently serving as area chair for finance and economics and chair of the tenured faculty in the School of Business.

Patel’s research, widely published in scholarly journals, has won eight awards from academic associations and two from practitioner associations. His early research focused on decision-making when pricing and issuing securities. “I think that research stream has been valued and had an impact in the profession because it was among the early studies in that area,” he says.

Patel says inspiration for a line of inquiry can come from anywhere — chatting with a colleague, reading an article in The Wall Street Journal, a question from a student during class, but he says a number of his research projects are the result of conversations with alumni. 

“Early in my career our dean, Charlie Moyer, gave me the opportunity to interact with our Board of Visitors and our Alumni Council, and I was able to talk to them, trying to understand the differences between what academic research suggests corporate leaders do and what they actually do,” Patel says. “I’ve continued such conversations over the years.”

In his current research, Patel has returned to a favored topic of executive compensation, now examining it in terms of environmental, social and governance (ESG) policies.

“ESG has been this big topic in the past several years but now some are hammering down on it, and it seems like everybody’s suddenly backing away from using it,” Patel says. “Our question is, if ESG is important, do firms incentivize CEOs using ESG metrics in the compensation structure?” 

Patel notes that there is disagreement — including among himself and some of his co-authors — about corporate responsibility for ESG issues, including climate change. 

“Some companies have chosen to take it upon themselves to do what they can do to reduce carbon emissions because they honestly believe they have a role in doing so. You’ve got other companies who feel very strongly that their job should be to maximize value for their shareholders. So, we’ve got a debate, but that doesn’t answer the question of what exactly companies are doing,” Patel says. “Companies have been saying ESG is important, so are they incentivizing their senior management to follow through? The next question becomes, if they are doing it, are there hard metrics they are using to evaluate awarding compensation? Are there certain quantifiable targets or is it qualitative and directional, which makes it easier to pay someone even if they don’t hit specific targets?” 

Initial data analysis in the US shows ESG compensation is typically based on qualitative factors rather than being metric-driven. We are now investigating whether there are significant differences internationally in the use of ESG metrics in executive compensation among firms across countries and what role cultural differences may play in explaining these findings.

“What’s interesting to me,” Patel says, “is that this isn’t a settled matter in the press or in politics or in academe or in corporate governance.”