@techreport{NBERw13732,
 title = "Stock-Based Compensation and CEO (Dis)Incentives",
 author = "Efraim Benmelech and Eugene Kandel and Pietro Veronesi",
 institution = "National Bureau of Economic Research",
 type = "Working Paper",
 series = "Working Paper Series",
 number = "13732",
 year = "2008",
 month = "January",
 URL = "http://www.nber.org/papers/w13732",
 abstract = {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.},
}