Disclosure of Executive Compensation Contracts: An Economic Analysis

43 Pages Posted: 16 May 2007

See all articles by Pascal Frantz

Pascal Frantz

London School of Economics

Norvald Instefjord

University of Essex - Essex Business School

Martin Walker

University of Manchester - Manchester Business School

Date Written: March 2007

Abstract

Disclosure of executive compensation schemes has been made mandatory over the past decade in many countries including the UK and the US. Firms however tend not to fully disclose the functional form of their executive compensation schemes. This paper provides a rationale for the lack of voluntary disclosure by firms.

It introduces a voluntary disclosure model in which executive compensation solves a moral hazard problem, the resolution of which depends on proprietary information. It provides conditions under which equilibria involving either disclosure or nondisclosure of the executive compensation scheme can obtain and shows that shareholders are better off precommitting not to disclose the executive compensation scheme whenever possible. It establishes that executive directors are better off too in the absence of disclosure of executive compensation schemes. It furthermore shows that mandating the disclosure of executive compensation may not increase the richness of investors' information set.

Keywords: Executive compensation, disclosure, regulation

JEL Classification: D82, G34, C72, J33, M41, M45

Suggested Citation

Frantz, Pascal and Instefjord, Norvald and Walker, Martin, Disclosure of Executive Compensation Contracts: An Economic Analysis (March 2007). Available at SSRN: https://ssrn.com/abstract=986729 or http://dx.doi.org/10.2139/ssrn.986729

Pascal Frantz (Contact Author)

London School of Economics ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
442079557233 (Phone)
442079557420 (Fax)

Norvald Instefjord

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Martin Walker

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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