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Liquidity and Manipulation of Executive Compensation Schemes

Author

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  • Ulf Axelson
  • Sandeep Baliga

Abstract

Compensation contracts have been criticized for encouraging managers to manipulate information. This includes bonus schemes that encourage earnings smoothing, and option packages that allow managers to cash out early when the firm is overvalued. We show that the intransparency induced by these contract features is critical for giving long-term incentives. Lack of transparency makes it harder for the owner to engage in ex post optimal but ex ante inefficient liquidity provision to the manager. For the same reason, it is often optimal to "pay for luck" (i.e., tie long-term compensation to variables that the manager has no influence over, but may have private information about, such as future profitability of the whole industry). The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Suggested Citation

  • Ulf Axelson & Sandeep Baliga, 2009. "Liquidity and Manipulation of Executive Compensation Schemes," The Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 3907-3939, October.
    • Handle: RePEc:oup:rfinst:v:22:y:2009:i:10:p:3907-3939
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    File URL: http://hdl.handle.net/10.1093/rfs/hhn095
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    Citations

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    Cited by:

    1. Edmans, Alex & Gottlieb, Daniel & Chaigneau, Pierre, 2014. "The Value of Informativeness for Contracting," CEPR Discussion Papers 10180, Centre for Economic Policy Research.
    2. Chaigneau, Pierre & Edmans, Alex & Gottlieb, Daniel, 2018. "Does improved information improve incentives?," Journal of Financial Economics, Elsevier, vol. 130(2), pages 291-307.
    3. Emre Ozdenoren & Kathy Yuan, 2012. "Stock Market Tournaments," Koç University-TUSIAD Economic Research Forum Working Papers 1222, Koc University-TUSIAD Economic Research Forum.
    4. Weiwei Chen & Benjamin Melamed & Oleg Sokolinskiy & Ben Sopranzetti, 2017. "Cash Conversion Systems in Corporate Subsidiaries," Manufacturing & Service Operations Management, INFORMS, vol. 19(4), pages 604-619, October.
    5. Rydqvist, Kristian, 2010. "Tax Arbitrage with Risk and Effort Aversion - Swedish Lottery Bonds 1970-1990," SIFR Research Report Series 70, Institute for Financial Research.
    6. Yan Zhao & Ehsan Elahi & Zainab Khalid & Xuegang Sun & Fang Sun, 2023. "Environmental, Social and Governance Performance: Analysis of CEO Power and Corporate Risk," Sustainability, MDPI, vol. 15(2), pages 1-18, January.
    7. Chaigneau, Pierre, 2018. "The optimal timing of CEO compensation," Finance Research Letters, Elsevier, vol. 24(C), pages 90-94.
    8. Ormazabal, Gaizka, 2018. "The Role of Stakeholders in Corporate Governance: A View from Accounting Research," CEPR Discussion Papers 12775, Centre for Economic Policy Research.
    9. Benjamin E. Hermalin & Michael S. Weisbach, 2012. "Information Disclosure and Corporate Governance," Journal of Finance, American Finance Association, vol. 67(1), pages 195-234, February.
    10. Dreber, Anna & Rand, David G. & Garcia, Justin R. & Wernerfelt, Nils & Lum, J. Koji & Zeckhauser, Richard, 2010. "Dopamine and Risk Preferences in Different Domains," Working Paper Series rwp10-012, Harvard University, John F. Kennedy School of Government.
    11. Bijapur, Mohan, 2011. "Moral hazard and renegotiation of multi-signal contracts," LSE Research Online Documents on Economics 56619, London School of Economics and Political Science, LSE Library.
    12. Lucas W. Davis & Catherine Hausman, 2020. "Are Energy Executives Rewarded for Luck?," The Energy Journal, , vol. 41(6), pages 157-180, November.
    13. Wenjiao Wang & Ziyuan Sun & Yuting Dong & Longyu Zhang, 2025. "Cost of debt financing, stock returns, and corporate strategic ESG disclosure: Evidence from China," Business Ethics, the Environment & Responsibility, John Wiley & Sons, Ltd., vol. 34(4), pages 1787-1812, October.
    14. Liu, Yun & Nanda, Vikram & Onal, Bunyamin & Silveri, Sabatino, 2021. "Employment mobility and pay for sector performance," Journal of Corporate Finance, Elsevier, vol. 70(C).
    15. Röell, Ailsa & Peng, Lin, 2009. "Managerial Incentives and Stock Price Manipulation," CEPR Discussion Papers 7442, Centre for Economic Policy Research.
    16. Pierre Chaigneau, 2012. "On the Value of Improved Informativeness," Cahiers de recherche 1205, CIRPEE.

    More about this item

    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

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