Managers' Compensation And Misreporting: A Costly State Verification Approach
Abstract"We look for the optimal shareholder-manager contract leading to high effort and truthful revelation of firm performance. This twofold incentive compatibility constraint calls for a convex compensation scheme (a fixed wage plus a stock option) coupled with a state contingent audit. In order to reduce expected verification costs, an optimal stock option plan assigns the manager a large number of options with high strike price. It is suggested that focusing the audit activity (and supervision) on the exercise of stock option packages is a better solution to the problem of misreporting than giving up stock options as a compensation tool. "("JEL "D82, G30, M40, M52) Copyright (c) 2008 Western Economic Association International.
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Bibliographic InfoArticle provided by Western Economic Association International in its journal Economic Inquiry.
Volume (Year): 47 (2009)
Issue (Month): 2 (04)
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Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- M40 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - General
- M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
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- Baglioni, Angelo & Colombo, Luca, 2011. "The effects of imperfect auditing on managerial compensation," International Review of Economics & Finance, Elsevier, Elsevier, vol. 20(4), pages 542-548, October.
- R. Andergassen, 2005.
"High powered Incentives and Fraudulent Behavior: Stock based versus Stock Option based Compensation,"
542, Dipartimento Scienze Economiche, Universita' di Bologna.
- Andergassen, Rainer, 2008. "High-powered incentives and fraudulent behavior: Stock-based versus stock option-based compensation," Economics Letters, Elsevier, Elsevier, vol. 101(2), pages 122-125, November.
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