Quarterly Journal of Economics Vol. 125 No. 4 2010

Stock-Based Compensation and CEO (Dis)Incentives

E. Benmelech^1,2; Eugene Kandel^1,2; P VERONESI^1,2

¹ Center for Economic and Policy Research · ² National Bureau of Economic Research

Abstract

The use of stock-based compensation as a solution to agency problems between shareholders and managers has increased dramatically since the early 1990s. We show that in a dynamic rational expectations model with asymmetric information, stock-based compensation not only induces managers to exert costly effort, but also induces them to conceal bad news about future growth options and to choose suboptimal investment policies to support the pretense. This leads to a severe overvaluation and a subsequent crash in the stock price. Our model produces many predictions that are consistent with the empirical evidence and are relevant to understanding the current crisis.

DOI

10.1162/qjec.2010.125.4.1769

Volume

125

Issue

4

Pages

1769-1820

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓