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Executive Compensation and Short-termist Behavior in Speculative Markets

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  • Patrick Bolton
  • Jose A. Scheinkman
  • Wei Xiong

Abstract

We present a multiperiod agency model of stock-based executive compensation in a speculative stock market, where investors have heterogeneous beliefs and stock prices may deviate from underlying fundamentals and include a speculative option component. This component arises from the option to sell the stock in the future to potentially overoptimistic investors. We show that optimal compensation contracts may emphasize short-term stock performance, at the expense of long-run fundamental value, as an incentive to induce managers to pursue actions which increase the speculative component in the stock price. Our model provides a different perspective on the recent corporate crisis than the “rent extraction view” of executive compensation. Copyright 2006, Wiley-Blackwell.

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 506439000000000124.

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Date of creation: 21 Jan 2003
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Handle: RePEc:cla:levarc:506439000000000124

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