Executive Compensation and Short-Termist Behavior in Speculative Markets

56 Pages Posted: 25 May 2006 Last revised: 2 Nov 2010

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: May 2003

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 for the recent corporate crisis than the increasingly popular `rent extraction view' of executive compensation.

Suggested Citation

Bolton, Patrick and Xiong, Wei and Scheinkman, José, Executive Compensation and Short-Termist Behavior in Speculative Markets (May 2003). NBER Working Paper No. w9722, Available at SSRN: https://ssrn.com/abstract=410649

Patrick Bolton (Contact Author)

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Wei Xiong

Princeton University - Department of Economics ( email )

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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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