Executive Compensation and Short-Termist Behavior in Speculative Markets

55 Pages Posted: 28 May 2003

See all articles by Patrick Bolton

Patrick Bolton

Columbia Business School - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Wei Xiong

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

José Scheinkman

Columbia University; Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: November 13, 2005

Abstract

We present a multiperiod agency model of stock based executive compensation in a speculative stock market, where investors are overconfident and stock prices may deviate from underlying fundamentals and include a speculative option component. This component arises from the option to sell the stock in the future to potentially overoptimistic investors. We show that optimal compensation contracts may emphasize short-term stock performance, at the expense of long run fundamental value, as an incentive to induce managers to pursue actions which increase the speculative component in the stock price. Our model provides a different perspective on the recent corporate crisis than the `rent extraction view' of executive compensation.

Keywords: Executive Compensation, Short-term Behavior, Speculative Market, Corporate Governance

Suggested Citation

Bolton, Patrick and Xiong, Wei and Scheinkman, José, Executive Compensation and Short-Termist Behavior in Speculative Markets (November 13, 2005). Available at SSRN: https://ssrn.com/abstract=391881 or http://dx.doi.org/10.2139/ssrn.391881

Patrick Bolton

Columbia Business School - Department of Economics ( email )

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HOME PAGE: http://www0.gsb.columbia.edu/faculty/pbolton/

Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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European Corporate Governance Institute (ECGI)

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Wei Xiong (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

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José Scheinkman

Columbia University ( email )

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Princeton University - Department of Economics ( email )

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HOME PAGE: http://www.princeton.edu/~joses

National Bureau of Economic Research (NBER)

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