SIFR Research Report Series, Institute for Financial Research
Liquidity and Manipulation of Executive Compensation Schemes
() and Sandeep Baliga
Abstract: Several standard components of managerial compensation
contracts have been criticized for encouraging managers to manipulate
short-term information about the firm, thereby reducing transparency. This
includes bonus schemes that encourage earnings smoothing, and option
packages that allow managers to cash out early when the firm is overvalued.
We show in an optimal contracting framework that these components are
critical for giving long-term incentives to managers. The lack of
transparency induced by the features of the contract makes it harder for
the principal to engage in ex post optimal but ex ante inefficient
liquidity provision to the manager.
Keywords: Executive compensation; earnings management; transparency; (follow links to similar papers)
JEL-Codes: G34; J33; (follow links to similar papers)
43 pages, July 15, 2007
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