Contractual Managerial Incentives with Stock Price Feedback

摘要

We study the effect of financial market frictions on managerial compensation. We embed a market microstructure model into an otherwise standard contracting framework, and analyze optimal pay for-performance when managers use information they learn from the market in their investment decisions. In a less frictional market, the improved information content of stock prices helps guide manage-rial decisions and thereby necessitates lower-powered compensation. Exploiting a randomized experiment, we document evidence that pay for-performance is lowered in response to reduced market frictions. Firm investment also becomes more sensitive to stock prices during the experiment, consistent with increased managerial learning from the market.