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Liquidity and Manipulation of Executive Compensation Schemes

Author

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  • Axelson, Ulf

    () (Swedish Institute for Financial Research)

  • Baliga, Sandeep

    (Northwestern University)

Abstract

Several standard components of managerial compensation contracts have been criticized for encouraging managers to manipulate short-term information about the firm, thereby reducing transparency. 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 in an optimal contracting framework that these components are critical for giving long-term incentives to managers. The lack of transparency induced by the features of the contract makes it harder for the principal to engage in ex post optimal but ex ante inefficient liquidity provision to the manager.

Suggested Citation

  • Axelson, Ulf & Baliga, Sandeep, 2007. "Liquidity and Manipulation of Executive Compensation Schemes," SIFR Research Report Series 54, Institute for Financial Research.
  • Handle: RePEc:hhs:sifrwp:0054
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Emre Ozdenoren & Kathy Yuan, 2012. "Stock Market Tournaments," FMG Discussion Papers dp706, Financial Markets Group.
    2. 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.
    3. Pierre Chaigneau, 2012. "On the Value of Improved Informativeness," Cahiers de recherche 1205, CIRPEE.
    4. 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.
    5. Peng, Lin & Röell, Ailsa A, 2009. "Managerial Incentives and Stock Price Manipulation," CEPR Discussion Papers 7442, C.E.P.R. Discussion Papers.
    6. Chaigneau, Pierre & Edmans, Alex & Gottlieb, Daniel, 2014. "The Value of Informativeness for Contracting," CEPR Discussion Papers 10180, C.E.P.R. Discussion Papers.
    7. 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.
    8. Rydqvist, Kristian, 2010. "Tax Arbitrage with Risk and Effort Aversion - Swedish Lottery Bonds 1970-1990," SIFR Research Report Series 70, Institute for Financial Research.
    9. Pierre Chaigneau, 2012. "The Optimal Timing of CEO Compensation," Cahiers de recherche 1207, CIRPEE.

    More about this item

    Keywords

    Executive compensation; earnings management; transparency;

    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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