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Real Incentive Effects of Soft Information

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  • Peter O. Christensen
  • Hans Frimor
  • Florin Şabac

Abstract

Both soft, noncontractible, and hard, contractible, information are informative about managerial ability and future firm performance. If a manager's future compensation depends on expectations of ability or future performance, then the manager has implicit incentives to affect the information. We examine the real incentive effects of soft information in a dynamic agency with limited commitment. When long‐term contracts are renegotiated, the rewards for future performance inherent in long‐term contracts allow the principal partial control over the implicit incentives. This is because the soft information affects the basis for contract renegotiation. With short‐term contracts, the principal has no control over the basis for contract negotiation, and thus long‐term contracts generally dominate short‐term contracts. With long‐term contracts, the principal's control over implicit incentives is characterized in terms of effective contracting on an implicit aggregation of the soft information that arises from predicting (forming expectations of) future performance. We provide sufficient conditions for soft information to have no real incentive effects. In general, implicit incentives not controllable by the principal include fixed effects, such as career concerns driven by labor markets external to the agency. When controllable incentives span the fixed effects of career concerns, the latter have no real effects with regard to total managerial incentives—they would optimally be the same with or without career concerns. Our analysis suggests empirical tests for estimating career concerns that should explicitly incorporate noncontractible information. Pouvoir incitatif réel de l'information incertaine Qu'elle soit incertaine (soft), et non susceptible d’être intégrée à un contrat, ou factuelle, et susceptible de l’être, l'information renseigne le destinataire sur les capacités de la direction et la performance future de l'entreprise. Si sa rémunération future dépend des anticipations quant à la capacité et à la performance future, le dirigeant sera implicitement motivé à modeler l'information. Les auteurs étudient le pouvoir incitatif réel de l'information incertaine dans une relation dynamique mandant‐mandataire avec engagement limité. Lorsque les contrats à long terme sont renégociés, la rétribution pour la performance future inhérente aux contrats à long terme permet au mandant d'exercer un contrôle partiel sur les incitatifs implicites. Cela tient au fait que l'information incertaine influe sur les paramètres de la renégociation contractuelle. Dans le cas des contrats à court terme, le mandant n'exerce aucun contrôle sur les paramètres de la négociation contractuelle, de sorte que les contrats à long terme ont généralement préséance sur les contrats à court terme. Dans le cas des contrats à long terme, le contrôle exercé par le mandant sur les incitatifs implicites se concrétise dans l'efficacité des dispositions contractuelles fondées sur l'agrégation implicite de l'information incertaine relative aux prévisions (c'est‐à‐dire aux anticipations formées) quant à la performance future. Les auteurs veillent à ce que les conditions soient suffisantes pour que l'information incertaine n'ait pas de pouvoir incitatif réel. En général, les incitatifs implicites sur lesquels le mandant ne peut exercer de contrôle englobent les effets fixes, tels que les préoccupations professionnelles engendrées par les marchés de travail extérieurs à la relation mandant‐mandataire. Lorsque les incitatifs sur lesquels un contrôle peut être exercé couvrent les effets fixes des préoccupations professionnelles, ces dernières n'ont pas de pouvoir incitatif réel auprès des dirigeants dans leur ensemble — leur incidence est, de façon optimale, la même avec ou sans préoccupations professionnelles. À la suite de cette analyse, les auteurs suggèrent des tests empiriques permettant l'estimation des préoccupations professionnelles, tests qui devraient explicitement incorporer de l'information non susceptible d’être intégrée aux contrats.

Suggested Citation

  • Peter O. Christensen & Hans Frimor & Florin Şabac, 2020. "Real Incentive Effects of Soft Information," Contemporary Accounting Research, John Wiley & Sons, vol. 37(1), pages 514-541, March.
  • Handle: RePEc:wly:coacre:v:37:y:2020:i:1:p:514-541
    DOI: 10.1111/1911-3846.12516
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    3. Christian Lukas, 2023. "On costless‐renegotiation proofing in binary agency models," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(4), pages 2481-2494, June.

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