Benmelech, Efraim. <br/><br/>
Stock-Based Compensation and CEO (Dis)Incentives / 
Efraim Benmelech, Eugene Kandel, Pietro Veronesi. 
 - Cambridge, Mass.  National Bureau of Economic Research  2008. 
 - 1 online resource:  illustrations (black and white); 
 - NBER working paper series  no. w13732 .
 - Working Paper Series (National Bureau of Economic Research)  no. w13732. .
<br/><br/> January 2008. 
<br/><br/> Stock-based compensation is the standard solution to agency problems between shareholders and managers. In a dynamic rational expectations equilibrium model with asymmetric information we show that although stock-based compensation causes managers to work harder, it also induces them to hide any worsening of the firm's investment opportunities by following largely sub-optimal investment policies. This problem is especially severe for growth firms, whose stock prices then become over-valued while managers hide the bad news to shareholders. We find that a firm-specific compensation package based on both stock and earnings performance instead induces a combination of high effort, truth revelation and optimal investments. The model produces numerous predictions that are consistent with the empirical evidence. 
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