TY  - BOOK
AU  - Benmelech,Efraim
AU  - Kandel,Eugene
AU  - Veronesi,Pietro
ED  - National Bureau of Economic Research.
TI  - Stock-Based Compensation and CEO (Dis)Incentives
T2  - NBER working paper series
PY  - 2008///
CY  - Cambridge, Mass.
PB  - National Bureau of Economic Research
N1  - January 2008; Hardcopy version available to institutional subscribers
N2  - 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
UR  - https://www.nber.org/papers/w13732
UR  - http://dx.doi.org/10.3386/w13732
ER  -