Title: Stock-based compensation and ceo (dis)incentives
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.