The Effects of Short-Selling Threats on Incentive Contracts: Evidence from an Experiment

Review of Financial Studies, Forthcoming

48 Pages Posted: 24 Mar 2013 Last revised: 18 Oct 2016

See all articles by David De Angelis

David De Angelis

Rice University - Jesse H. Jones Graduate School of Business

Gustavo Grullon

Rice University - Jesse H. Jones Graduate School of Business

Sebastien Michenaud

Kellstadt Graduate School of Business

Date Written: October 17, 2016

Abstract

This paper examines the effects of a shock to the stock-price formation process on the design of executive incentive contracts. We find that an exogenous removal of short-selling constraints causes firms to convexify compensation payoffs by granting relatively more stock options to their managers. We also find that treated firms adopt new anti-takeover provisions. These results suggest that when firms face the threat of bear raids, they incentivize managers to take actions that mitigate the adverse effects of unrestrained short selling. Overall, this paper provides causal evidence that financial markets affect incentive contract design.

Keywords: Executive Compensation, Short-Selling Constraints,Risk-Taking Incentives, Left-Tail Risk, Stock Price Informativeness

JEL Classification: G30, G34, J33, M52

Suggested Citation

De Angelis, David and Grullon, Gustavo and Michenaud, Sebastien, The Effects of Short-Selling Threats on Incentive Contracts: Evidence from an Experiment (October 17, 2016). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2238236 or http://dx.doi.org/10.2139/ssrn.2238236

David De Angelis (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

HOME PAGE: http://www.de-angelis.com

Gustavo Grullon

Rice University - Jesse H. Jones Graduate School of Business ( email )

P.O. Box 2932
Houston, TX 77252-2932
United States
(713) 348-6138 (Phone)
(713) 348-6331 (Fax)

HOME PAGE: http://www.ruf.rice.edu/~grullon/

Sebastien Michenaud

Kellstadt Graduate School of Business ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States
(312)362-5001 (Phone)

HOME PAGE: http://www.sebastienmichenaud.com

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