Stock-based compensation and ceo (dis)incentives
By: Efraim Benmelech, Eugene Kandel, Pietro Veronesi.
Contributors: Kandel, Eugene, 1959-; Veronesi, Pietro.; National Bureau of Economic Research.
Series: NBER working paper series -- working paper 13732; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 13732.
Publisher: National Bureau of Economic Research
Published: 2008
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "Stock-based compensation is the standard solution to agency problems between shareholders and managers.  In a dynamic rational expectations equilibrium model with asymmetric information we show that although stock-based compensation causes managers to work harder, it also induces them to hide any worsening of the firm's investment opportunities by following largely sub-optimal investment policies.  This problem is especially severe for growth firms, whose stock prices then become over-valued while managers hide the bad news to shareholders.  We find that a firm-specific compensation package based on both stock and earnings performance instead induces a combination of high effort, truth revelation and optimal investments.  The model produces numerous predictions that are consistent with the empirical evidence"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 6/6/2008.

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