Discussion paper

DP7442 Managerial Incentives and Stock Price Manipulation

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.


Röell, A and L Peng (2009), ‘DP7442 Managerial Incentives and Stock Price Manipulation‘, CEPR Discussion Paper No. 7442. CEPR Press, Paris & London. https://cepr.org/publications/dp7442