American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Contractual Managerial Incentives with Stock Price Feedback
American Economic Review
vol. 109,
no. 7, July 2019
(pp. 2446–68)
Abstract
We study the effect of financial market frictions on managerial compensation. We embed a market microstructure model into an otherwise standard contracting framework, and analyze optimal pay-for-performance when managers use information they learn from the market in their investment decisions. In a less frictional market, the improved information content of stock prices helps guide managerial decisions and thereby necessitates lower-powered compensation. Exploiting a randomized experiment, we document evidence that pay-for-performance is lowered in response to reduced market frictions. Firm investment also becomes more sensitive to stock prices during the experiment, consistent with increased managerial learning from the market.Citation
Lin, Tse-Chun, Qi Liu, and Bo Sun. 2019. "Contractual Managerial Incentives with Stock Price Feedback." American Economic Review, 109 (7): 2446–68. DOI: 10.1257/aer.20151310Additional Materials
JEL Classification
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- G12 Asset Pricing; Trading Volume; Bond Interest Rates
- G14 Information and Market Efficiency; Event Studies; Insider Trading
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G34 Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance
- M12 Personnel Management; Executives; Executive Compensation
- M52 Personnel Economics: Compensation and Compensation Methods and Their Effects