Stock-based compensation and ceo (dis)incentives

Efraim Benmelech, Eugene Kandel, Pietro Veronesi

Research output: Contribution to journalArticle

79 Citations (Scopus)

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.

Original languageEnglish (US)
Pages (from-to)1769-1820
Number of pages52
JournalQuarterly Journal of Economics
Volume125
Issue number4
DOIs
StatePublished - Nov 1 2010

Fingerprint

Stock-based compensation
Managers
Incentives
Chief executive officer
News
Overvaluation
Crash
Growth options
Stock prices
Prediction
Shareholders
Investment policy
Empirical evidence
Rational expectations models
Asymmetric information
Agency problems

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this

Benmelech, Efraim ; Kandel, Eugene ; Veronesi, Pietro. / Stock-based compensation and ceo (dis)incentives. In: Quarterly Journal of Economics. 2010 ; Vol. 125, No. 4. pp. 1769-1820.
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Stock-based compensation and ceo (dis)incentives. / Benmelech, Efraim; Kandel, Eugene; Veronesi, Pietro.

In: Quarterly Journal of Economics, Vol. 125, No. 4, 01.11.2010, p. 1769-1820.

Research output: Contribution to journalArticle

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