Economic consequences of managerial compensation contract disclosure

Yan Xiong and Xu Jiang

Journal of Accounting and Economics, 2022, vol. 73, issue 2

Abstract: We analytically study the economic consequences of the disclosure of managerial compensation contracts in a setting where two firms, by designing compensation contracts for their respective managers, compete for a new investment opportunity. Each manager is privately informed about her firm's profitability from this investment. We find that the disclosure leads to firms' emphasizing short-term stock performance in their managers' contracts. This, in turn, induces managers to signal favorable private information via myopic overinvestment, which deters rival firms' investments and gains their own firms a competitive edge. Nonetheless, such strategic use of compensation contracts is absent when the contracts are not disclosed; under this regime, equilibrium contracts only focus on long-term outcomes. Moreover, while disclosure-mandate-induced managerial myopia erodes firm profits, it may benefit consumer and social welfare. Our theory illuminates the economic consequences of the Compensation Discussion and Analysis (CD&A) disclosure implemented in 2006.

Keywords: Compensation contract disclosure; CD&A disclosure; Managerial myopia; Coordination failure; Market competition (search for similar items in EconPapers)
JEL-codes: G34 L13 M12 M52 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:73:y:2022:i:2:s016541012200012x

DOI: 10.1016/j.jacceco.2022.101489

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