Bonuses and Non-Public Information in Publicly Traded Firms
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.
|Date of creation:||01 Aug 2000|
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- In-Koo Cho & David M. Kreps, 1987.
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