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Executive Compensation and Short-Termist Behaviour in Speculative Markets

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  • Patrick Bolton
  • José 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.

Suggested Citation

  • Patrick Bolton & José Scheinkman & Wei Xiong, 2006. "Executive Compensation and Short-Termist Behaviour in Speculative Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(3), pages 577-610.
    • Handle: RePEc:oup:restud:v:73:y:2006:i:3:p:577-610
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    File URL: http://hdl.handle.net/10.1111/j.1467-937X.2006.00388.x
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    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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