TY - JOUR
T1 - Market efficiency, managerial compensation, and real efficiency
AU - Singh, Rajdeep
AU - Yerramilli, Vijay
N1 - Publisher Copyright:
© 2014 Elsevier B.V.
PY - 2014/12/1
Y1 - 2014/12/1
N2 - 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.
AB - 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.
KW - Market efficiency
KW - Pay-performance sensitivity
KW - Real efficiency
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U2 - 10.1016/j.jcorpfin.2014.03.006
DO - 10.1016/j.jcorpfin.2014.03.006
M3 - Article
AN - SCOPUS:84913586336
SN - 0929-1199
VL - 29
SP - 561
EP - 578
JO - Journal of Corporate Finance
JF - Journal of Corporate Finance
ER -