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Stock-Based Compensation and CEO (Dis)Incentives / Efraim Benmelech, Eugene Kandel, Pietro Veronesi.
- Format:
- Book
- Author/Creator:
- Benmelech, Efraim.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w13732.
- NBER working paper series no. w13732
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Other Title:
- Stock-Based Compensation and CEO
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2008.
- Summary:
- Stock-based compensation is the standard solution to agency problems between shareholders and managers. In a dynamic rational expectations equilibrium model with asymmetric information we show that although stock-based compensation causes managers to work harder, it also induces them to hide any worsening of the firm's investment opportunities by following largely sub-optimal investment policies. This problem is especially severe for growth firms, whose stock prices then become over-valued while managers hide the bad news to shareholders. We find that a firm-specific compensation package based on both stock and earnings performance instead induces a combination of high effort, truth revelation and optimal investments. The model produces numerous predictions that are consistent with the empirical evidence.
- Notes:
- Print version record
- January 2008.
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