We present a multiperiod agency model of stock-based executive compensation in a speculative stock market, where investors have heterogeneous beliefs and stock prices may deviate from underlying fundamentals and include a speculative option component. This component arises from the option to sell the stock in the future to potentially overoptimistic investors. We show that optimal compensation contracts may emphasize short-term stock performance, at the expense of long-run fundamental value, as an incentive to induce managers to pursue actions which increase the speculative component in the stock price. Our model provides a different perspective on the recent corporate crisis than the “rent extraction view” of executive compensation.

China’s economic model involves regular and intensive government interventions in financial markets, while Western policymakers often refrain from substantial interventions outside crisis periods. We develop a theoretical framework to rationalize the approaches of both China and the West to managing the financial system as being optimal given the differences in their respective economies. In this framework, a government leans against trading of noise traders but at the expense of introducing policy noise to the market. Our welfare analysis shows that under certain underlying economic conditions, the optimal government policy induces a government-centric equilibrium, in which government intervention is so intensive that all investors choose to acquire private information about policy noise rather than fundamentals. This policy regime characterizes China’s approach with financial stability prioritized over other policy objectives.