Executive Compensation and Short-Termist Behaviour in Speculative Markets
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. Copyright 2006, Wiley-Blackwell.
Year of publication: |
2006
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Authors: | Bolton, Patrick ; Scheinkman, José ; Xiong, Wei |
Published in: |
Review of Economic Studies. - Oxford University Press. - Vol. 73.2006, 3, p. 577-610
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Publisher: |
Oxford University Press |
Saved in:
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