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Managerial Compensation Duration and Stock Price Manipulation

Josef Schroth

Staff Working Papers from Bank of Canada

Abstract: I build a model of optimal managerial compensation where managers each have a privately observed propensity to manipulate short-term stock prices. It is shown that this informational asymmetry reverses some of the conventional wisdom about the relationship between reliance on short-term pay and propensity to manipulate. The optimal compensation scheme features a negative relationship between pay duration and manager manipulation activity, reconciling theory with recent empirical findings (Gopalan et al., 2014). Further, the model predicts that managers who spend more resources manipulating short-term stock prices also put more effort into generating longterm firm value.

Keywords: Economic models; Labour markets; Recent economic and financial developments (search for similar items in EconPapers)
JEL-codes: D82 G14 G30 M12 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2015
New Economics Papers: this item is included in nep-cfn and nep-hrm
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