Equity-Based Incentives and Effective Signalling Strategies

27 Pages Posted: 12 Nov 2012

See all articles by Zhaolin Li

Zhaolin Li

The University of Sydney Business School

Lusheng Shao

The University of Melbourne

Cheng Qian

affiliation not provided to SSRN

Date Written: November 2012

Abstract

We investigate how the manager of a publicly traded firm may distort operational decisions to signal product quality when he/she receives equity-based incentives offered by shareholders. We show that the shareholders' optimal incentive contract induces the manager to engage in wasteful actions. However, the cost of such actions can be drastically reduced by optimising the equity-based incentive contract. The price-signalling strategy is nearly as good as the multidimensional strategy, whereas the inventory-signalling strategy is costly for the shareholders. We also quantify how various parameters could affect shareholder wealth and the optimal equity-based incentive contract.

Keywords: Equity-based incentives, multidimensional signalling games, mechanism designs

JEL Classification: D82, D86

Suggested Citation

Li, Zhaolin and Shao, Lusheng and Qian, Cheng, Equity-Based Incentives and Effective Signalling Strategies (November 2012). Available at SSRN: https://ssrn.com/abstract=2174188 or http://dx.doi.org/10.2139/ssrn.2174188

Zhaolin Li (Contact Author)

The University of Sydney Business School ( email )

Room 490, Merewether Building
Sydney, NSW 2006
Australia

HOME PAGE: http://www.econ.usyd.edu.au/staff/erickl

Lusheng Shao

The University of Melbourne ( email )

198 Berkeley Street
Carlton, 3031
Australia

Cheng Qian

affiliation not provided to SSRN

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