Myopic Corporate Behaviour with Optimal Management Incentives.

Existing models in which stock markets lead to corporate 'short-termism' rely on an exogenously imposed objective for top managers. This paper endogenizes both managers' concern for short-term stock prices and the resulting distortions. The authors show that, when the manager can trade on her own account on the stock market in a way that is observable to market participants but which is not verifiable in court, shareholders will choose an incentive contract that induces a bias towards short-term returns. Consistent with recent evidence, the short-term bias is greater when the optimal contract provides low-powered management incentives. Copyright 1999 by Blackwell Publishing Ltd