Abstract

http://ssrn.com/abstract=1140042
 
 

References (24)



 
 

Citations (20)



 


 



Stock-Based Compensation and CEO (Dis)Incentives


Effi Benmelech


Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Eugene Kandel


Hebrew University of Jerusalem - Department of Economics; Centre for Economic Policy Research (CEPR)

Pietro Veronesi


University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)


CEPR Discussion Paper No. DP6515

Abstract:     
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 overvalued 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.

Number of Pages in PDF File: 52

Keywords: CEO compensation, Sub-optimal investments

JEL Classification: G31, G34, G35

working papers series


Date posted: June 5, 2008  

Suggested Citation

Benmelech, Effi and Kandel , Eugene and Veronesi, Pietro, Stock-Based Compensation and CEO (Dis)Incentives. CEPR Discussion Paper No. DP6515. Available at SSRN: http://ssrn.com/abstract=1140042

Contact Information

Efraim Benmelech
Harvard University - Department of Economics ( email )
Littauer Center
Cambridge, MA 02138
United States
617-496-4787 (Phone)
617-495-8570 (Fax)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Eugene Kandel (Contact Author)
Hebrew University of Jerusalem - Department of Economics ( email )
School of Business
Mount Scopus
Jerusalem 91905
Israel
+972 2 588 3137 (Phone)
+972 2 581 6071 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Pietro Veronesi
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-6348 (Phone)
773-702-0458 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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References:  24
Citations:  20

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