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Managerial Compensation Duration and Stock Price Manipulation

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  • Josef Schroth

Abstract

I build a model of optimal managerial compensation where managers each have a privately observed propensity to manipulate short-term stock prices. It is shown that this informational asymmetry reverses some of the conventional wisdom about the relationship between reliance on short-term pay and propensity to manipulate. The optimal compensation scheme features a negative relationship between pay duration and manager manipulation activity, reconciling theory with recent empirical findings (Gopalan et al., 2014). Further, the model predicts that managers who spend more resources manipulating short-term stock prices also put more effort into generating longterm firm value.

Suggested Citation

  • Josef Schroth, 2015. "Managerial Compensation Duration and Stock Price Manipulation," Staff Working Papers 15-25, Bank of Canada.
    • Handle: RePEc:bca:bocawp:15-25
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    References listed on IDEAS

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    More about this item

    Keywords

    Economic models; Labour markets; Recent economic and financial developments;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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