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Executive Compensation and Short-Termist Behaviour in Speculative Markets

Patrick Bolton, José Scheinkman and Wei Xiong
The Review of Economic Studies
Vol. 73, No. 3 (Jul., 2006), pp. 577-610
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/20185021
Page Count: 34
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Executive Compensation and Short-Termist Behaviour in Speculative Markets
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Abstract

We present a multiperiod agency model of stock-based executive compensation in a speculative stock market, where investors have heterogeneous beliefs and stock prices may deviate from underlying fundamentals and include a speculative option component. This component arises from the option to sell the stock in the future to potentially overoptimistic investors. We show that optimal compensation contracts may emphasize short-term stock performance, at the expense of long-run fundamental value, as an incentive to induce managers to pursue actions which increase the speculative component in the stock price. Our model provides a different perspective on the recent corporate crisis than the "rent extraction view" of executive compensation.

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