Performance-Based Compensation and Firm Value: Experimental evidence

Glenn Pfeiffer () and Timothy Shields
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Glenn Pfeiffer: Argyros School of Business and Economics, Chapman University, USA

Working Papers from Chapman University, Economic Science Institute

Abstract: Motivated by research reporting positive price reactions to adoption of performance-based compensation plans, we examine price reactions to compensation contracting in experimental markets. The design allows us to manipulate variables separately and study issues of adverse selection (sorting) and moral hazard (incentives). We find that managers select contracts based on their private information, and that information is conveyed to the market by the choice of compensation contract and reflected in price. Additionally, we find that managers do not always exert costly effort in spite of favorable incentives to do so (shirking). As a result, the market is skeptical of incentive benefits. Thus, while we find evidence of overbidding in some treatments, we find that market prices are consistent with private information revelation but undervalue incentive benefits.

Keywords: compensation; experimental markets; sorting; incentives (search for similar items in EconPapers)
JEL-codes: C92 D82 G12 J33 M52 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2012
New Economics Papers: this item is included in nep-cta and nep-hrm
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Persistent link: https://EconPapers.repec.org/RePEc:chu:wpaper:12-17

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