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Bonuses and Non-Public Information in Publicly Traded Firms

  • Rachel Hayes

    (University of Chicago)

  • Scott Schaefer

    (Northwestern University)

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    The literature on relational incentive contracts suggests that firms may be able to condition payments to employees on information that is not available to those outside the firm. Given this, market participants may use the magnitude of such payments to infer the non-public information, which then may give firms a reason to choose wage payments strategically. We combine the literatures on relational incentive contracts (from labor economics) and signaling to financial markets (from finance) and examine equilibria of a signaling game in which payments from a firm to a manager convey information regarding the firm's future cash flows. Our model reveals how the nature of the firm's relationship with its manager is affected by the firm's incentive to choose wage payments strategically. We discuss implications of our model for firms' choices over the mix of compensation instruments for top executives, as well as possible effects of executive compensation disclosure rules.

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    Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1550.

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    Date of creation: 01 Aug 2000
    Date of revision:
    Handle: RePEc:ecm:wc2000:1550
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    1. repec:tpr:qjecon:v:98:y:1983:i:3:p:23-54 is not listed on IDEAS
    2. Jonathan Levin, 2000. "Relational Incentive Contracts," Working Papers 01002, Stanford University, Department of Economics.
    3. Stein, Jeremy C, 1988. "Takeover Threats and Managerial Myopia," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 61-80, February.
    4. Bengt Holmstrom, 1980. "Equilibrium Long-Term Labor Contracts," Discussion Papers 414R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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    6. repec:tpr:qjecon:v:102:y:1987:i:2:p:179-221 is not listed on IDEAS
    7. Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers 41, University of California at Berkeley.
    8. Holmstrom, Bengt & Tirole, Jean, 1993. "Market Liquidity and Performance Monitoring," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 678-709, August.
    9. George Baker & Robert Gibbons & Kevin J. Murphy, 1993. "Subjective Performance Measures in Optimal Incentive Contracts," NBER Working Papers 4480, National Bureau of Economic Research, Inc.
    10. Bushman, Robert M. & Indjejikian, Raffi J. & Smith, Abbie, 1996. "CEO compensation: The role of individual performance evaluation," Journal of Accounting and Economics, Elsevier, vol. 21(2), pages 161-193, April.
    11. Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-51, September.
    12. repec:tpr:qjecon:v:102:y:1987:i:1:p:147-59 is not listed on IDEAS
    13. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
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