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| Author: | Garvey, G. T. Grant, S. King, S. P. |
| Title: | Talking down the firm: Short-term market manipulation and optimal management compensation |
| Journal: | International Journal of Industrial Organization
1998 : SEP, VOL. 16:5, p. 555-570 |
| Index terms: | Shares Prices Companies Markets Management Pay |
| Language: | eng |
| Abstract: | The paper analyzes the optimal use of short- and long-term share prices in management incentive contracts. A key innovation of our model is that the short-term share price is determined even before the manager has made her effort choice and therefore cannot be informative in the standard principal-agent sense. It is shown that when traders on the short-term market have as much information as the manager does, the optimal contract fully insures the manager against short-term share price fluctuations. However, if the manager has private information that is relevant to the short-term share price and is fully insured then she will have an incentive to `talk down the firm'- to manipulate the short-term share price and so raise perceptions of her value added. These results endogenize corporate managers' concern with short-term stock market fluctuations, and show how manipulation can occur even with optimal contracts. |
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