Contractual Managerial Incentives with Stock Price Feedback
Qi Liu and
American Economic Review, 2019, vol. 109, issue 7, 2446-68
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-codes: D83 G12 G14 G32 G34 M12 M52 (search for similar items in EconPapers)
Note: DOI: 10.1257/aer.20151310
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Persistent link: https://EconPapers.repec.org/RePEc:aea:aecrev:v:109:y:2019:i:7:p:2446-68
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