Managerial Incentives and Stock Price Manipulation

Peng, Lin; Röell, Ailsa

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Managerial Incentives and Stock Price Manipulation

CEPR Discussion Paper No. DP7442

51 Pages Posted: 7 Oct 2009

See all articles by Lin Peng

Lin Peng

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Ailsa Röell

Columbia University, School of International and Public Affairs

There are 2 versions of this paper

Date Written: September 2009

Abstract

This paper presents a rational expectations model of optimal executive compensation in a setting where managers are in a position to manipulate short-term stock prices, and managers' propensity to manipulate is uncertain. Stock-based incentives elicit not only productive effort, but also costly information manipulation. We analyze the tradeoffs involved in conditioning pay on long- versus short-term performance and characterize a second-best optimal compensation scheme. The paper shows manipulation, and investors' uncertainty about it, affects the equilibrium pay contract and the informational efficiency of asset prices. The paper derives a range of new cross-sectional comparative static results and sheds light on corporate governance regulations.

Keywords: corporate governance, Executive compensation, long- versus short-term, manipulation uncertainty

JEL Classification: D8, G30, G34, J33, J41, K2

Suggested Citation: Suggested Citation

Peng, Lin and Röell, Ailsa A., Managerial Incentives and Stock Price Manipulation (September 2009). CEPR Discussion Paper No. DP7442, Available at SSRN: https://ssrn.com/abstract=1484474