Download This PaperEffects of Compensation Contracts Disclosure on Executive Behavior
17 Pages Posted: 27 Apr 2020
Date Written: April 3, 2020
Abstract
This study investigates how the disclosure of management compensation contracts affects executive behavior by modeling a situation in which both the principal-agent relationship and market interactions are important. We find that making the disclosure of these contracts mandatory creates proprietary costs for the firm. Additionally, we also analyze the effect of market competition and find that a manager works less in a more competitive environment when compensation contracts are undisclosed, whereas when disclosed, managers could either work harder or less diligently. Our work provides some interesting implications for empirical research. For example, we show that mandatory disclosure of compensation contracts increases both pay-performance sensitivity and managers’ total compensation.
Keywords: compensation contract disclosure, market competition, principal-agent model, oligopoly market
JEL Classification: D43, D86, M41, M48
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