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Bonuses and Non-Public Information in Publicly Traded Firms

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  • Rachel Hayes

    (University of Chicago)

  • Scott Schaefer

    (Northwestern University)

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    Abstract

    The literature on relational incentive contracts suggests that firms may be able to condition payments to employees on information that is not available to those outside the firm. Given this, market participants may use the magnitude of such payments to infer the non-public information, which then may give firms a reason to choose wage payments strategically. We combine the literatures on relational incentive contracts (from labor economics) and signaling to financial markets (from finance) and examine equilibria of a signaling game in which payments from a firm to a manager convey information regarding the firm's future cash flows. Our model reveals how the nature of the firm's relationship with its manager is affected by the firm's incentive to choose wage payments strategically. We discuss implications of our model for firms' choices over the mix of compensation instruments for top executives, as well as possible effects of executive compensation disclosure rules.

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    Bibliographic Info

    Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1550.

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    Date of creation: 01 Aug 2000
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    Handle: RePEc:ecm:wc2000:1550

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    1. Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers 41, University of California at Berkeley.
    2. Stein, Jeremy C, 1988. "Takeover Threats and Managerial Myopia," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 61-80, February.
    3. Holmstrom, Bengt, 1983. "Equilibrium Long-Term Labor Contracts," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 23-54, Supplemen.
    4. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
    5. Bull, Clive, 1987. "The Existence of Self-Enforcing Implicit Contracts," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 147-59, February.
    6. Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-51, September.
    7. Holmstrom, Bengt & Tirole, Jean, 1993. "Market Liquidity and Performance Monitoring," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 678-709, August.
    8. Jonathan Levin, 2000. "Relational Incentive Contracts," Working Papers 01002, Stanford University, Department of Economics.
    9. Baker, George & Gibbons, Robert & Murphy, Kevin J, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1125-56, November.
    10. Bushman, Robert M. & Indjejikian, Raffi J. & Smith, Abbie, 1996. "CEO compensation: The role of individual performance evaluation," Journal of Accounting and Economics, Elsevier, vol. 21(2), pages 161-193, April.
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