Liquidity and Manipulation of Executive Compensation Schemes

Ulf Axelson and Sandeep Baliga

Review of Financial Studies, 2009, vol. 22, issue 10, pages 3907-3939

Abstract: Compensation contracts have been criticized for encouraging managers to manipulate information. This includes bonus schemes that encourage earnings smoothing, and option packages that allow managers to cash out early when the firm is overvalued. We show that the intransparency induced by these contract features is critical for giving long-term incentives. Lack of transparency makes it harder for the owner to engage in ex post optimal but ex ante inefficient liquidity provision to the manager. For the same reason, it is often optimal to "pay for luck" (i.e., tie long-term compensation to variables that the manager has no influence over, but may have private information about, such as future profitability of the whole industry). The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Date: 2009

Downloads: (external link)
http://hdl.handle.net/10.1093/rfs/hhn095 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:oup:rfinst:v:22:y:2009:i:10:p:3907-3939

Ordering information: This journal article can be ordered from
http://www4.oup.co.uk/revfin/subinfo/

Access Statistics for this article

Review of Financial Studies is edited by Maureen O'Hara

More articles in Review of Financial Studies from Oxford University Press for Society for Financial Studies
Address: Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.
Contact information at EDIRC.
Series data maintained by Christopher F. Baum ().