Motivating Entrepreneurial Activity in a Firm

Posted: 17 Mar 2009

See all articles by Antonio E. Bernardo

Antonio E. Bernardo

University of California, Los Angeles (UCLA) - Finance Area

Hongbin Cai

Peking University - Guanghua School of Management

Jiang Luo

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 2009

Abstract

We examine the problem of motivating privately informed managers to engage in entrepreneurial activity to improve the quality of the firm's investment opportunities. The firm's investment and compensation policy must balance the manager's incentives to provide entrepreneurial effort and to report private information truthfully. The optimal policy is to underinvest (compared to first-best) and provide weak incentive pay in low-quality projects and overinvest (compared to first-best) and provide strong incentive pay in high-quality projects.

Keywords: D82, D86, G31

Suggested Citation

Bernardo, Antonio E. and Cai, Hongbin and Luo, Jiang, Motivating Entrepreneurial Activity in a Firm (March 2009). The Review of Financial Studies, Vol. 22, Issue 3, pp. 1089-1118, 2009. Available at SSRN: https://ssrn.com/abstract=1359526 or http://dx.doi.org/hhn029

Antonio E. Bernardo (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-2198 (Phone)
310-206-5455 (Fax)

Hongbin Cai

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Jiang Luo

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

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