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How Should Performance Signals Affect Contracts?

delete2021-03-03
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OA
AI
P
Pierre Chaigneau
A
Alex Edmans *
D
Daniel Gottlieb
DOI：10.1093/rfs/hhab026delete
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Abstract

Abstract

En 中文
The informativeness principle states that a contract should depend on informative signals. This paper studies how it should do so. Signals indicating that the output distribution has shifted to the left (e.g., weak industry performance) reduce the threshold for the manager to be paid; those indicating that output is a precise measure of effort (e.g., low volatility) decrease high thresholds and increase low thresholds. Surprisingly, good signals of performance need not reduce the threshold. Applying our model to performance-based vesting, we show that performance measures should affect the strike price, rather than the number of vesting options, contrary to practice.
Keywords:
MORAL HAZARD
1ST-ORDER APPROACH
EXECUTIVE-COMPENSATION
LIMITED-LIABILITY
TRADE-OFF
STOCK
INFORMATION
OPTIONS
PAY
INCENTIVES

Journal

Review of Financial Studies cover
Review of Financial Studies
IF:
5.4
Papers:
2.8K
Citations:
3.0W

Organization

Q
queens university - canada
Scholars:
1.8W
Papers: 1.7W
Citations: 29
C
centre for economic policy research - uk
Scholars:
512
Papers: 518
Citations: 1
U
university of london
Scholars:
21.5W
Papers: 19.7W
Citations: 305
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