Abstract

http://ssrn.com/abstract=891298
 
 

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Market Efficiency, Managerial Compensation, and Real Efficiency


Rajdeep Singh


University of Minnesota - Twin Cities - Carlson School of Management

Vijay Yerramilli


University of Houston, C. T. Bauer College of Business

March 2014

Journal of Corporate Finance, Forthcoming

Abstract:     
We examine how an exogenous improvement in market efficiency, which allows the stock market to obtain more precise information about the firm's intrinsic value, affects the shareholder-manager contracting problem, managerial incentives, and shareholder value. A key assumption in the model is that stock market investors do not observe the manager's pay-performance sensitivity ex ante. We show that an increase in market efficiency weakens managerial incentives by making the firm's stock price less sensitive to the firm's current performance. The impact on real efficiency and shareholder value varies depending on the composition of the firm's intrinsic value.

Number of Pages in PDF File: 40

Keywords: Real efficiency, informational efficiency, pay-performance sensitivity

JEL Classification: G30, G31

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Date posted: March 16, 2006 ; Last revised: May 2, 2014

Suggested Citation

Singh, Rajdeep and Yerramilli, Vijay, Market Efficiency, Managerial Compensation, and Real Efficiency (March 2014). Journal of Corporate Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=891298 or http://dx.doi.org/10.2139/ssrn.891298

Contact Information

Rajdeep Singh (Contact Author)
University of Minnesota - Twin Cities - Carlson School of Management ( email )
19th Avenue South
Minneapolis, MN 55455
United States
612-624-1061 (Phone)
612-626-1335 (Fax)
HOME PAGE: http://umn.edu/~rajsingh
Vijay Yerramilli
University of Houston, C. T. Bauer College of Business ( email )
Houston, TX 77204
United States
713-743-2516 (Phone)
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