American Economic Review Vol. 109 No. 7 2019
Contractual Managerial Incentives with Stock Price Feedback
Abstract
We study the effect of financial market frictions on managerial compensation. We embed a market microstructure model into an otherwise standard contracting framework, and analyze optimal pay-for-performance when managers use information they learn from the market in their investment decisions. In a less frictional market, the improved information content of stock prices helps guide managerial decisions and thereby necessitates lower-powered compensation. Exploiting a randomized experiment, we document evidence that pay-for-performance is lowered in response to reduced market frictions. Firm investment also becomes more sensitive to stock prices during the experiment, consistent with increased managerial learning from the market.
- DOI
- 10.1257/aer.20151310
- Volume
- 109
- Issue
- 7
- Pages
- 2446-2468
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref