Contractual Managerial Incentives with Stock Price Feedback

Abstract

We study the effect of financial market frictions on managerial compensation. We embed a market microstructure model into an otherwise standard contracting framework, and analyze optimal pay-for-performance when managers use information they learn from the market in their investment decisions. In a less frictional market, the improved information content of stock prices helps guide managerial decisions and thereby necessitates lower-powered compensation. Exploiting a randomized experiment, we document evidence that pay-for-performance is lowered in response to reduced market frictions. Firm investment also becomes more sensitive to stock prices during the experiment, consistent with increased managerial learning from the market. (JEL D83, G12, G14, G32, G34, M12, M52)

The Real Effects of Modern Information Technologies

“…2 By definition, the extent of revelatory price efficiency is manifested in changes in managerial behavior. 3 There is no direct measure of revelatory price efficiency, and prior research largely relies on the investment-to-price sensitivity framework to draw inferences on managerial learning (e.g., Chen, Goldstein, and Jiang 2007;Bakke and Whited 2010;Fré sard 2012, 2014;Bai, Philippon, and Savov 2016;Edmans, Jayaraman, and Schneemeier 2017;Dessaint, Foucault, Fré sard, and Matray 2019;Jayaraman and Wu 2019;Lin, Liu, and Sun 2019).…”

The Indirect Effects of Trading Restrictions: Evidence from a Quasi-Natural Experiment

“…A number of 6 studies suggest that short sellers are informed and short-sale constraints slow information discovery and decrease price efficiency (Cohen, Diether, and Malloy (2007), Bris, Goetzmann and Zhu (2007), Saffi and Sigurdsson (2011), Beber and Pagano (2013), Boehmer and Wu (2013), Chang, Luo, and Ren (2013), Curtis and Fargher (2014), Fang, Huang and Karpoff (2016), and Engelberg, Reed, and Ringgenberg (2017)). 3 Finally, and more broadly, our findings are related to the effects of trading restrictions on managerial compensation and corporate governance (e.g., Massa, Zhang, and Zhang (2014), Lin, Liu, and Sun (2018)). Finally, our results also add to the literature that links information asymmetry and credit spreads (e.g., Ivashina, 2009;Han and Zhou, 2014;Derrien, Kecskes, and Mansi, 2016).…”

The Real Effects of Modern Information Technologies

“…2 By definition, the extent of revelatory price efficiency is manifested in changes in managerial behavior. 3 There is no direct measure of revelatory price efficiency, and prior research largely relies on the investment-to-price sensitivity framework to draw inferences on managerial learning (e.g., Chen, Goldstein, and Jiang 2007;Bakke and Whited 2010;Fré sard 2012, 2014;Bai, Philippon, and Savov 2016;Edmans, Jayaraman, and Schneemeier 2017;Dessaint, Foucault, Fré sard, and Matray 2019;Jayaraman and Wu 2019;Lin, Liu, and Sun 2019).…”