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- Title
Contractual Managerial Incentives with Stock Price Feedback.
- Authors
Lin, Tse-Chun; Liu, Qi; Sun, Bo
- Abstract
We study the effect of financial market frictions on managerial compensation. We embed a market microstructure model into an otherwise standard contracting framework, and analyze optimal pay-for-performance when managers use information they learn from the market in their investment decisions. In a less frictional market, the improved information content of stock prices helps guide managerial decisions and thereby necessitates lower-powered compensation. Exploiting a randomized experiment, we document evidence that pay-for-performance is lowered in response to reduced market frictions. Firm investment also becomes more sensitive to stock prices during the experiment, consistent with increased managerial learning from the market. (JEL D83, G12, G14, G32, G34, M12, M52)
- Subjects
FINANCIAL markets; PAY for performance; EXECUTIVE compensation; WAGES; STOCK prices; INVESTMENTS
- Publication
American Economic Review, 2019, Vol 109, Issue 7, p2446
- ISSN
0002-8282
- Publication type
Article
- DOI
10.1257/aer.20151310