Managerial Incentives and Stock Price Manipulation

Röell, Ailsa and Lin Peng

No 7442, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper presents a rational expectations model of optimal executive compensation in a setting where managers are in a position to manipulate short-term stock prices, and managers' propensity to manipulate is uncertain. Stock-based incentives elicit not only productive effort, but also costly information manipulation. We analyze the tradeoffs involved in conditioning pay on long- versus short-term performance and characterize a second-best optimal compensation scheme. The paper shows manipulation, and investors' uncertainty about it, affects the equilibrium pay contract and the informational efficiency of asset prices. The paper derives a range of new cross-sectional comparative static results and sheds light on corporate governance regulations.

Keywords: Corporate governance; Executive compensation; Long- versus short-term; Manipulation uncertainty (search for similar items in EconPapers)
JEL-codes: D8 G30 G34 J33 J41 K2 (search for similar items in EconPapers)
Date: 2009-09
New Economics Papers: this item is included in nep-cta
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Citations: View citations in EconPapers (9)

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