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Insider Information and Performance Pay

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  • George-Levi Gayle
  • Robert A. Miller
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    Abstract

    This article provides evidence that managers have private information they exploit for financial gain at the expense of shareholders. It develops a model of optimal contracting to show that moral hazard, hidden actions taken by agents, can rationalize why a principal would optimally induce agents to benefit from their private information. Estimates from a structural model shows that moral hazard is an important economic factor. This leads to the conclusion that, in practice, shareholders and managers might optimally agree upon an arrangement where managers systematically exploit their private information about the firm. (JEL codes: J3, K2, G3 and C5). Copyright The Author 2009. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

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    File URL: http://hdl.handle.net/10.1093/cesifo/ifp010
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    Bibliographic Info

    Article provided by CESifo in its journal CESifo Economic Studies.

    Volume (Year): 55 (2009)
    Issue (Month): 3-4 ()
    Pages: 515-541

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    Handle: RePEc:oup:cesifo:v:55:y:2009:i:3-4:p:515-541

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    Cited by:
    1. Inci, A. Can, 2012. "Insider trading activity, tenure length, and managerial compensation," Global Finance Journal, Elsevier, vol. 23(3), pages 151-166.
    2. Brenner, Steffen, 2011. "On the irrelevance of insider trading for managerial compensation," European Economic Review, Elsevier, vol. 55(2), pages 293-303, February.

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