Executive Compensation and Short-Termist Behavior in Speculative Markets

Posted: 30 Nov 2005

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)

José Scheinkman

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

Wei Xiong

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

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Abstract

We present a multiperiod agency model of stock based executive compensation in a speculative stock market, where investors have heterogeneous beliefs 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, Over-investment, Short-term Behavior, Speculative Markets

JEL Classification: J33, D82, G14, M41, M43

Suggested Citation

Bolton, Patrick and Scheinkman, José and Xiong, Wei, Executive Compensation and Short-Termist Behavior in Speculative Markets. Review of Economic Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=858284

Patrick Bolton

Columbia Business School - Department of Economics ( email )

420 West 118th Street
New York, NY 10027
United States

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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European Corporate Governance Institute (ECGI)

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Belgium

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José Scheinkman

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Princeton University - Department of Economics ( email )

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Princeton, NJ 08544
United States
609-258-4020 (Phone)
609-258-6419 (Fax)

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

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Wei Xiong (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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