Market efficiency,managerial compensation,and real efficiency |
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| Affiliation: | 1. Carlson School of Management, University of Minnesota, United States;2. C. T. Bauer College of Business, University of Houston, United States;1. Department of Finance and International Business, Fox School of Business, Temple University, Philadelphia, PA 19122, USA;2. School of Management, Tokyo University of Science, Simokiyoku 500, Kuki-shi, Saitama-ken 346-8512, Japan;3. ACAP Advisory Public Company Limited, 195 Empire Tower, 2-3, 22nd Fl., South Sathorn Road, Yannawa, Sathorn, Bangkok 10120, Thailand;1. International Business School, Brandeis University, 415 South Street, Waltham, MA 02454, USA;2. Graduate School of Business Administration, Bar Ilan University, Max ve-Anna Webb St, Ramat Gan, 52900, Israel;1. Finance and Economics Division, Columbia Business School, Columbia University, New York, NY 10027, United States;2. Division of Banking and Finance, Nanyang Business School, Nanyang Technological University, Singapore;3. Department of Finance and Economics, Rutgers Business School, Rutgers University, Piscataway, NJ 08854-8054, United States;4. Korea University Business School, 145 Anam-ro, Seongbuk-gu, Seoul 136-701, Republic of Korea;1. College of Business, Florida State University, Tallahassee, FL, USA;2. Rotterdam School of Management, Erasmus University, Rotterdam, The Netherlands;3. University of Groningen, Groningen, The Netherlands |
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| Abstract: | We examine how an exogenous improvement in market efficiency, which allows the stock market to obtain more precise information about the firm's intrinsic value, affects the shareholder–manager contracting problem, managerial incentives, and shareholder value. A key assumption in the model is that stock market investors do not observe the manager's pay-performance sensitivity ex ante. We show that an increase in market efficiency weakens managerial incentives by making the firm's stock price less sensitive to the firm's current performance. The impact on real efficiency and shareholder value varies depending on the composition of the firm's intrinsic value. |
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