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Managerial Incentives and Stock Price Manipulation
Author(s) -
PENG LIN,
RÖELL AILSA
Publication year - 2014
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12129
Subject(s) - incentive , executive compensation , corporate governance , stock (firearms) , compensation (psychology) , stock options , stock price , position (finance) , microeconomics , rational expectations , business , economics , time horizon , monetary economics , finance , econometrics , mechanical engineering , psychology , paleontology , series (stratigraphy) , psychoanalysis , engineering , biology
We present a rational expectations model of optimal executive compensation in a setting where managers are in a position to manipulate short‐term stock prices and the manipulation propensity is uncertain. We analyze the tradeoffs involved in conditioning pay on long‐ versus short‐term performance and show how manipulation, and investors' uncertainty about it, affects the equilibrium pay contract and the informativeness of prices. Firm and manager characteristics determine the optimal compensation scheme: the strength of incentives, the pay horizon, and the use of options. We consider how corporate governance and disclosure regulations can help create an environment that enables better contracting.