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Stock-based managerial compensation, price informativeness, and the incentive to overinvest

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  • Strobl, Günter

Abstract

This paper investigates the relationship among a firm's managerial incentive scheme, the informativeness of its stock price, and its investment policy. It shows that the shareholders' concerns about the effectiveness of stock-based compensation can lead to overinvestment. However, unlike other explanations in the literature, our results are neither caused by suboptimal incentive contracts nor do they rely on the assumption that managers are “empire builders.” Rather, overinvestment serves to induce information production by outside investors. By accepting positive and negative NPV projects, a firm effectively increases the market's uncertainty about its cash flow, thereby giving traders more incentives to become informed.

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  • Strobl, Günter, 2014. "Stock-based managerial compensation, price informativeness, and the incentive to overinvest," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 594-606.
    • Handle: RePEc:eee:corfin:v:29:y:2014:i:c:p:594-606
    DOI: 10.1016/j.jcorpfin.2013.12.003
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    Cited by:

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    2. Caio Machado & Ana Elisa Pereira, 2020. "Competing for Stock Market Feedback," Documentos de Trabajo 545, Instituto de Economia. Pontificia Universidad Católica de Chile..
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    4. Thierry Foucault & Laurent Fresard, 2019. "Corporate Strategy, Conformism, and the Stock Market," Review of Financial Studies, Society for Financial Studies, vol. 32(3), pages 905-950.
    5. Adra, Samer & Barbopoulos, Leonidas G., 2023. "The informational consequences of good and bad mergers," Journal of Corporate Finance, Elsevier, vol. 78(C).
    6. James Dow & Itay Goldstein & Alexander Guembel, 2017. "Incentives for Information Production in Markets where Prices Affect Real Investment," Journal of the European Economic Association, European Economic Association, vol. 15(4), pages 877-909.
    7. Ni, Yensen & Huang, Paoyu & Chen, Yuhsin, 2019. "Board structure, considerable capital, and stock price overreaction informativeness in terms of technical indicators," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 514-528.
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    10. Hsiao-Fen Hsiao & Tingyong Zhong & Hasan Dincer, 2019. "Analysing Managers’ Financial Motivation for Sustainable Investment Strategies," Sustainability, MDPI, vol. 11(14), pages 1-22, July.

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    More about this item

    Keywords

    Managerial incentive contracts; Market monitoring; Overinvestment;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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