CEO Incentives and Stock Price Dynamics: An Experimental Approach

Te Bao, Edward Halim, Charles N. Noussair and Yohanes Riyanto

No 2017-10, Experimental Economics Center Working Paper Series from Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University

Abstract: We investigate experimentally how granting a firm's CEO with stock ownership and the opportunity to trade influence the CEO's effort and the price of the firm's stock. In our design, CEO effort affects the fundamental value of the firm. The findings suggest that, contrary to a widely held belief, stock ownership alone does not significantly increase the CEO's effort. However, CEOs tend to accumulate additional shares when they are given the opportunity to trade, and this leads to greater CEO effort. In all treatments, stock prices tend to reflect underlying fundamentals and bubbles are rare. When CEOs can trade shares, the asset exhibits somewhat greater mispricing and volatility.

Pages: 40
Date: 2017-12
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