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Information Externalities, Share-Price Based Incentives and Managerial Behaviour

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Abstract

We survey recent theoretical research on the effects of short-term share-price based marginal incentive schemes. Such schemes can induce inefficient managerial behaviour in both hidden action and hidden type contexts. These problems arise from informational asymmetries: managers take actions to manipulate the information flow rather than to maximize firm value. More generally, imperfect transmission of information between managers and shareholders or between managers of different firms can lead to similar distortions even when the parties' interests are aligned.

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File URL: http://cowles.econ.yale.edu/P/cd/d11a/d1107.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1107.

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Length: 26 pages
Date of creation: Jul 1995
Date of revision:
Publication status: Published in Journal of Economic Surveys (1996), 10: 1-21
Handle: RePEc:cwl:cwldpp:1107

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Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
Phone: (203) 432-3702
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Web page: http://cowles.econ.yale.edu/
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Keywords: Information externalities; share-price based incentives;

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References

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Citations

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Cited by:
  1. David Hirshleifer & Siew Hong Teoh, 2003. "Herd Behaviour and Cascading in Capital Markets: a Review and Synthesis," European Financial Management, European Financial Management Association, vol. 9(1), pages 25-66.
  2. Andrea Melis & Silvia Carta & Silvia Gaia, 2012. "Executive remuneration in blockholder-dominated firms. How do Italian firms use stock options?," Journal of Management and Governance, Springer, vol. 16(3), pages 511-541, August.
  3. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9164, University Library of Munich, Germany.
  4. Pirschel, Inske & Ahrens, Steffen & Snower, Dennis, 2013. "A Theory of Price Adjustment under Loss Aversion," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79793, Verein für Socialpolitik / German Economic Association.
  5. Effinger, Matthias R. & Polborn, Mattias K., 2001. "Herding and anti-herding: A model of reputational differentiation," European Economic Review, Elsevier, vol. 45(3), pages 385-403, March.
  6. Jason G. Cummins & Ingmar Nyman, 2002. "The dark side of competitive pressure," Finance and Economics Discussion Series 2002-43, Board of Governors of the Federal Reserve System (U.S.).
  7. Ingmar Nyman, 2004. "Stock Market Speculation and Managerial Myopia," Economics Working Paper Archive at Hunter College 402, Hunter College Department of Economics, revised 2004.

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