Liquidity and manipulation of executive compensation schemes

Ulf Axelson*, Sandeep Baliga

*Corresponding author for this work

Research output: Contribution to journalArticle

12 Scopus citations

Abstract

Compensation contracts have been criticized for encouraging managers to manipulate information. This includes bonus schemes that encourage earnings smoothing, and option packages that allow managers to cash out early when the firm is overvalued. We show that the intransparency induced by these contract features is critical for giving long-term incentives. Lack of transparency makes it harder for the owner to engage in ex post optimal but ex ante inefficient liquidity provision to the manager. For the same reason, it is often optimal to "pay for luck" (i.e., tie long-term compensation to variables that the manager has no influence over, but may have private information about, such as future profitability of the whole industry).

Original languageEnglish (US)
Pages (from-to)3907-3939
Number of pages33
JournalReview of Financial Studies
Volume22
Issue number10
DOIs
StatePublished - Oct 2009

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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