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Myopic Corporate Behaviour with Optimal Management Incentives

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  • Gerald T. Garvey
  • Simon Grant
  • Stephen P. King

Abstract

Existing models in which stock markets lead to corporate ‘short‐termism’ rely on an exogenously imposed objective for top managers. This paper endogenizes both managers’ concern for short‐term stock prices and the resulting distortions. We show that when the manager can trade on her own account on the stock market in a way that is observable to market participants but which is not verifiable in court, shareholders will choose an incentive contract which induces a bias towards short‐term returns. Consistent with recent evidence, the short‐term bias is greater when the optimal contract provides low‐powered management incentives.

Suggested Citation

  • Gerald T. Garvey & Simon Grant & Stephen P. King, 1999. "Myopic Corporate Behaviour with Optimal Management Incentives," Journal of Industrial Economics, Wiley Blackwell, vol. 47(2), pages 231-250, June.
    • Handle: RePEc:bla:jindec:v:47:y:1999:i:2:p:231-250
    DOI: 10.1111/1467-6451.00099
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    Cited by:

    1. Nyman, Ingmar, 2005. "Stock market speculation and managerial myopia," Review of Financial Economics, Elsevier, vol. 14(1), pages 61-79.
    2. Anindita Chakravarty & Rajdeep Grewal, 2011. "The Stock Market in the Driver's Seat! Implications for R&D and Marketing," Management Science, INFORMS, vol. 57(9), pages 1594-1609, March.
    3. Ingmar Nyman, 2005. "Stock market speculation and managerial myopia," Review of Financial Economics, John Wiley & Sons, vol. 14(1), pages 61-79.
    4. Elie Matta & Jean McGuire, 2008. "Too Risky to Hold? The Effect of Downside Risk, Accumulated Equity Wealth, and Firm Performance on CEO Equity Reduction," Organization Science, INFORMS, vol. 19(4), pages 567-580, August.
    5. Ljungqvist, Alexander & Asker, John & Farre-Mensa, Joan, 2010. "Does the Stock Market Harm Investment Incentives?," CEPR Discussion Papers 7857, C.E.P.R. Discussion Papers.

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