Bonus Schemes and Trading Activity

50 Pages Posted: 5 Mar 2013

See all articles by Elena Pikulina

Elena Pikulina

Tilburg University - Department of Finance

Luc Renneboog

Tilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)

Jenke ter Horst

TIAS School for Business and Society

Philippe Tobler

University of Zurich - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: March 5, 2013

Abstract

Little is known about how different bonus schemes affect traders’ propensity to trade and which bonus schemes improve traders’ performance. We study the effects of linear versus threshold (convex) bonus schemes on traders’ behavior. Traders purchase and sell shares in an experimental stock market on the basis of fundamental and technical information (evolution of the market index, past share price evolution, realized earnings, and analysts’ earnings forecasts). We find that traders trade more intensively (the number of transactions augments) under the threshold than under the linear bonus scheme. When market conditions are such that a higher profitability can be more easily reached, trading frequency only increases little under a threshold scheme, but the size of trades is significantly larger than in the case of market conditions with lower profitability. Furthermore, trading intensity significantly decreases when bonus thresholds are reached but only after building in a safety margin. Under the threshold scheme, the traders’ performance is lower (even when there are no transaction costs) than under the linear bonus scheme as a consequence of poorer market timing. This is especially the case when earning money by trading is relatively difficult (under low profitability conditions). Nevertheless, under low profitability conditions, traders seem to collect more information about the relationships between share price and market returns, earnings, and earnings forecasts, apply more effort to understand those relationships, and finally show better performance.

Keywords: Bonus, Compensation, Investment Decisions, Trading Behavior

JEL Classification: G11, J33

Suggested Citation

Pikulina, Elena and Renneboog, Luc and ter Horst, Jenke R. and Tobler, Philippe, Bonus Schemes and Trading Activity (March 5, 2013). ECGI - Finance Working Paper No. 354. Available at SSRN: https://ssrn.com/abstract=2228055 or http://dx.doi.org/10.2139/ssrn.2228055

Elena Pikulina

Tilburg University - Department of Finance ( email )

Tilburg
Netherlands

Luc Renneboog (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Warandelaan 2
5000 LE Tilburg
Netherlands
+13 31 466 8210 (Phone)
+13 31 466 2875 (Fax)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Jenke R. Ter Horst

TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

Philippe Tobler

University of Zurich - Department of Economics ( email )

Zürich, CH-8006
Switzerland

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