Bonuses and Non-Public Information in Publicly Traded Firms |
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Authors: | Email author" target="_blank">Rachel?M?HayesEmail author Scott?Schaefer |
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Institution: | (1) David Eccles School of Business, University of Utah, 1645 E. Campus Center Drive, Salt Lake City, UT 84112, USA |
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Abstract: | Recent research in accounting explores how firms use “individual” or “non-financial” measures of performance in executive
compensation contracts. We model a firm that conditions bonus payments to executives on information that is not available
to those outside the firm. This raises two issues. First, market participants may use the magnitude of such payments to infer
the non-public information. Second, because information that is non-public is, by extension, non-verifiable, the firm cannot
write explicit contracts based on it. Combining the relational incentive contracts and financial signaling literatures, we
examine equilibria of a signaling game in which bonus payments from a firm to a manager convey non-public information regarding
the firm’s future cash flows. Our main result is that increases in corporate myopia can, under some conditions, lead to increased
profits. This finding is contrary to that typically found in financial signaling models. |
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Keywords: | CEO compensation Implicit contracts Financial signaling |
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