Managerial Compensation and Stock Price Manipulation
Posted: 23 May 2019
Date Written: December 1, 2018
This paper studies the role of optimal managerial compensation in reducing uncertainty about manager reporting objectives. It is shown that, paradoxically, firm owners allow managers with higher propensity to manipulate the short‐term stock price to push for higher powered and more short‐term‐focused equity incentives. Such managers also work harder, and manipulate more, but may not generate higher firm profits. The model is consistent with existing empirical findings about the relationship between manipulation and equity pay, suggesting that heterogeneity in manager manipulation propensities may be an important driver of heterogeneity in pay. Novel testable predictions are developed.
Keywords: managerial compensation contracts; stock price manipulation; private information; duration of equity incentives
JEL Classification: D82; D86; G30; M12; M40
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