Executive Compensation and Short-Termist Behaviour in Speculative Markets

Patrick Bolton, Jose Scheinkman () and Wei Xiong

Review of Economic Studies, 2006, vol. 73, issue 3, pages 577-610

Abstract: We present a multiperiod agency model of stock-based executive compensation in a speculative stock market, where investors have heterogeneous beliefs and stock prices may deviate from underlying fundamentals and include a speculative option component. This component arises from the option to sell the stock in the future to potentially overoptimistic investors. We show that optimal compensation contracts may emphasize short-term stock performance, at the expense of long-run fundamental value, as an incentive to induce managers to pursue actions which increase the speculative component in the stock price. Our model provides a different perspective on the recent corporate crisis than the "rent extraction view" of executive compensation. Copyright 2006 The Review of Economic Studies Limited.

Date: 2006
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Working Paper: Executive Compensation and Short-termist Behavior in Speculative Markets (2003)
Working Paper: Executive Compensation and Short-termist Behavior in Speculative Markets (2003)
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