publication . Preprint . Article . 2009

Managerial Incentives and Stock Price Manipulation

Lin Peng; Ailsa A. Röell;
Open Access
  • Published: 01 Sep 2009
Abstract
This paper presents a rational expectations model of optimal executive compensation in a setting where managers are in a position to manipulate short-term stock prices, and managers' propensity to manipulate is uncertain. Stock-based incentives elicit not only productive effort, but also costly information manipulation. We analyze the tradeoffs involved in conditioning pay on long- versus short-term performance and characterize a second-best optimal compensation scheme. The paper shows manipulation, and investors' uncertainty about it, affects the equilibrium pay contract and the informational efficiency of asset prices. The paper derives a range of new cross-se...
Subjects
free text keywords: corporate governance; Executive compensation; long- versus short-term; manipulation uncertainty, jel:D8, jel:G30, jel:G34, jel:J33, jel:J41, jel:K2, Stock price, Finance, business.industry, business, Incentive, Comparative statics, Economics, Rational expectations, Corporate governance, Executive compensation, Microeconomics, Financial economics
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