Contractual Managerial Incentives with Stock Price Feedback | Zendy

TseChun Lin | Zendy; Qi Liu | Zendy; Bo Sun | Zendy

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Contractual Managerial Incentives with Stock Price Feedback

Author(s) -

TseChun Lin,

Qi Liu,

Bo Sun

Publication year - 2019

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/aer.20151310

Subject(s) - economics , incentive , stock market , stock (firearms) , monetary economics , microeconomics , investment (military) , financial economics , mechanical engineering , paleontology , horse , politics , political science , law , engineering , biology

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)

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