Managerial Incentives and Stock Price Manipulation
62 Pages Posted: 5 Jan 2009 Last revised: 19 Mar 2014
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Managerial Incentives and Stock Price Manipulation
Managerial Incentives and Stock Price Manipulation
Date Written: September 28, 2013
Abstract
We present a rational expectations model of optimal executive compensation in a setting where managers are in a position to manipulate short-term stock prices and the manipulation propensity is uncertain. We analyze the tradeoffs involved in conditioning pay on long- versus short-term performance and show how manipulation, and investorsuncertainty about it, affects the equilibrium pay contract and the informativeness of prices. Firm and manager characteristics determine the optimal compensation scheme: the strength of incentives, the pay horizon, and the use of options. We consider how corporate governance and disclosure regulations can help create an environment that enables better contracting.
Keywords: Executive compensation, corporate governance, manipulation uncertainty, long- versus short-term
JEL Classification: D8, G30, G34, J33, J41, K2
Suggested Citation: Suggested Citation
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