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The optimal timing of CEO compensation

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  • Chaigneau, Pierre

Abstract

We extend a standard principal-agent model of CEO compensation by modeling the progressive attenuation of information asymmetries about firm value by shareholders in continuous time. The dynamics of the stock price process are affected by the continuous accumulation of exogenous shocks, and by the progressive resolution of information asymmetries. The optimal timing of compensation is the point in time at which the stock price is most informative about the manager’s action. When exogenous shocks accumulate at a constant rate over time and information asymmetries are resolved at a decreasing rate, the optimal timing of compensation is the point in time at which these two rates coincide.

Suggested Citation

  • Chaigneau, Pierre, 2018. "The optimal timing of CEO compensation," Finance Research Letters, Elsevier, vol. 24(C), pages 90-94.
  • Handle: RePEc:eee:finlet:v:24:y:2018:i:c:p:90-94
    DOI: 10.1016/j.frl.2017.07.008
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    Cited by:

    1. repec:oup:rfinst:v:21:y:2017:i:5:p:1805-1846. is not listed on IDEAS
    2. Wang, Cheng, 1997. "Incentives, CEO Compensation, and Shareholder Wealth in a Dynamic Agency Model," Journal of Economic Theory, Elsevier, vol. 76(1), pages 72-105, September.
    3. repec:eee:intfin:v:55:y:2018:i:c:p:29-49 is not listed on IDEAS
    4. repec:bla:joares:v:56:y:2018:i:5:p:1335-1381 is not listed on IDEAS
    5. Hoffmann, Florian & Inderst, Roman & Opp, Marcus, 2014. "Regulating Deferred Incentive Pay," CEPR Discussion Papers 9877, C.E.P.R. Discussion Papers.
    6. repec:oup:revfin:v:21:y:2017:i:5:p:1805-1846. is not listed on IDEAS
    7. Josef Schroth, 2015. "Managerial Compensation Duration and Stock Price Manipulation," Staff Working Papers 15-25, Bank of Canada.
    8. Ingolf Dittmann & Ko-Chia Yu & Dan Zhang, 2017. "How Important Are Risk-Taking Incentives in Executive Compensation?," Review of Finance, European Finance Association, vol. 21(5), pages 1805-1846.

    More about this item

    Keywords

    Deferred compensation; Executive compensation; Principal-agent model;

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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