The Effects of Short-Selling Threats on Incentive Contracts: Evidence from an Experiment

David De Angelis, Gustavo Grullon and Sébastien Michenaud

The Review of Financial Studies, 2017, vol. 30, issue 5, 1627-1659

Abstract: This paper examines the effects of a shock to the stock-price formation process on the design of executive incentive contracts. We find that an exogenous removal of short-selling constraints causes firms to convexify compensation payoffs by granting relatively more stock options to their managers. We also find that treated firms adopt new antitakeover provisions. These results suggest that when firms face the threat of bear raids, they incentivize managers to take actions that mitigate the adverse effects of unrestrained short selling. Overall, this paper provides causal evidence that financial markets affect incentive contract design.

JEL-codes: G18 G30 J33 M12 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (52)

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