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Managers' Compensation And Misreporting: A Costly State Verification Approach

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  • ANGELO BAGLIONI
  • LUCA COLOMBO

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 Info

Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 47 (2009)
Issue (Month): 2 (04)
Pages: 278-289

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Handle: RePEc:bla:ecinqu:v:47:y:2009:i:2:p:278-289

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Cited by:
  1. 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.
  2. R. Andergassen, 2005. "High powered Incentives and Fraudulent Behavior: Stock based versus Stock Option based Compensation," Working Papers 542, Dipartimento Scienze Economiche, Universita' di Bologna.

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