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Discussion Paper Details

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Title: Managerial Incentives and Stock Price Manipulation

Author(s): Lin Peng and Ailsa A R�ell

Publication Date: September 2009

Keyword(s): corporate governance, Executive compensation, long- versus short-term and manipulation uncertainty

Programme Area(s): Financial Economics

Abstract: This paper presents a rational expectations model of optimal executive compensation in a setting where managers are in a position to manipulate short-term stock prices, and managers' propensity to manipulate is uncertain. Stock-based incentives elicit not only productive effort, but also costly information manipulation. We analyze the tradeoffs involved in conditioning pay on long- versus short-term performance and characterize a second-best optimal compensation scheme. The paper shows manipulation, and investors' uncertainty about it, affects the equilibrium pay contract and the informational efficiency of asset prices. The paper derives a range of new cross-sectional comparative static results and sheds light on corporate governance regulations.

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Bibliographic Reference

Peng, L and R�ell, A. 2009. 'Managerial Incentives and Stock Price Manipulation'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7442