Managerial Incentives and Stock Price Manipulation

62 Pages Posted: 5 Jan 2009 Last revised: 19 Mar 2014

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

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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 investors’uncertainty 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

Peng, Lin and Röell, Ailsa A., Managerial Incentives and Stock Price Manipulation (September 28, 2013). Available at SSRN: https://ssrn.com/abstract=1321903 or http://dx.doi.org/10.2139/ssrn.1321903

Lin Peng (Contact Author)

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

17 Lexington Avenue
New York, NY 10010
United States

Ailsa A. Röell

Columbia University, School of International and Public Affairs ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-9289 (Phone)

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