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Executive Compensation and Short-Termist Behavior in Speculative Markets


Patrick Bolton


Columbia Business School - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Wei Xiong


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

Jose A. Scheinkman


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

May 2003

NBER Working Paper No. w9722

Abstract:     
We present a multiperiod agency model of stock based executive compensation in a speculative stock market, where investors are overconfident and stock prices may deviate from underlying fundamentals and include a speculative option component. This component arises from the option to sell the stock in the future to potentially overoptimistic investors. We show that optimal compensation contracts may emphasize short-term stock performance, at the expense of long run fundamental value, as an incentive to induce managers to pursue actions which increase the speculative component in the stock price. Our model provides a different perspective for the recent corporate crisis than the increasingly popular `rent extraction view' of executive compensation.

Number of Pages in PDF File: 56

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Date posted: May 25, 2006  

Suggested Citation

Bolton, Patrick and Xiong, Wei and Scheinkman, Jose A., Executive Compensation and Short-Termist Behavior in Speculative Markets (May 2003). NBER Working Paper No. w9722. Available at SSRN: http://ssrn.com/abstract=410649

Contact Information

Patrick Bolton (Contact Author)
Columbia Business School - Department of Economics ( email )
3022 Broadway
New York, NY 10027
United States
HOME PAGE: http://www0.gsb.columbia.edu/faculty/pbolton/

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
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Wei Xiong
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Jose A. Scheinkman
Columbia University ( email )
420 W. 118th Street
New York, NY 10027
United States
HOME PAGE: http://www.princeton.edu/~joses
Princeton University - Department of Economics ( email )
26 Prospect Avenue
Princeton, NJ 08544
United States
609-258-4020 (Phone)
609-258-6419 (Fax)
HOME PAGE: http://www.princeton.edu/~joses

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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