TY  - JOUR
AU  - Benmelech,Efraim
AU  - Kandel,Eugene
AU  - Veronesi,Pietro
TI  - Stock-Based Compensation and CEO (Dis)Incentives
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13732
PY  - 2008
Y2  - January 2008
UR  - http://www.nber.org/papers/w13732
L1  - http://www.nber.org/papers/w13732.pdf
N1  - Author contact info:
Efraim Benmelech
Harvard University
Department of Economics
Littauer 233
Cambridge, MA 02138
Tel: 617/496-4787
Fax: 617/495-8570
E-Mail: effi_benmelech@harvard.edu

Eugene Kandel
Department of Economics
Hebrew University
Mount Scopus
Jerusalem 91905, Israel
Tel: 972-2-588-3137
Fax: 972-2-581-6071
E-Mail: mskandel@mscc.huji.ac.il

Pietro Veronesi
University of Chicago
Booth School of Business
5807 South Woodlawn Avenue
Chicago, IL  60637
Tel: 773/702-6348
Fax: 773/702-0458
E-Mail: pietro.veronesi@chicagobooth.edu
AB  - 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.
ER  -