Stock-Based Compensation and CEO (Dis)Incentives

Pietro Veronesi, Eugene Kandel and Efraim Benmelech

No 6515, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Stock-based compensation is the standard solution to agency problems between shareholders and managers. In a dynamic rational expectations equilibrium model with asymmetric information we show that although stock-based compensation causes managers to work harder, it also induces them to hide any worsening of the firm?s investment opportunities by following largely sub-optimal investment policies. This problem is especially severe for growth firms, whose stock prices then become overvalued while managers hide the bad news to shareholders. We find that a firm-specific compensation package based on both stock and earnings performance instead induces a combination of high effort, truth revelation and optimal investments. The model produces numerous predictions that are consistent with the empirical evidence.

Keywords: Ceo compensation; Sub-optimal investments (search for similar items in EconPapers)
JEL-codes: G31 G34 G35 (search for similar items in EconPapers)
Date: 2007-10
New Economics Papers: this item is included in nep-bec and nep-cfn
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://cepr.org/publications/DP6515 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Stock-Based Compensation and CEO (Dis)Incentives (2010)
Working Paper: Stock-Based Compensation and CEO (Dis)Incentives (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:6515

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP6515

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().