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Myopic Corporate Behaviour with Optimal Management Incentives

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  • Garvey, Gerald T
  • Grant, Simon
  • King, Stephen P

Abstract

Existing models in which stock markets lead to corporate 'short-termism' rely on an exogenously imposed objective for top managers. This paper endogenizes both managers' concern for short-term stock prices and the resulting distortions. The authors show that, when the manager can trade on her own account on the stock market in a way that is observable to market participants but which is not verifiable in court, shareholders will choose an incentive contract that induces a bias towards short-term returns. Consistent with recent evidence, the short-term bias is greater when the optimal contract provides low-powered management incentives. Copyright 1999 by Blackwell Publishing Ltd

Suggested Citation

  • Garvey, Gerald T & Grant, Simon & King, Stephen P, 1999. "Myopic Corporate Behaviour with Optimal Management Incentives," Journal of Industrial Economics, Wiley Blackwell, vol. 47(2), pages 231-250, June.
    • Handle: RePEc:bla:jindec:v:47:y:1999:i:2:p:231-50
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    Cited by:

    1. Garen Markarian & Juan Santalo´, 2014. "Product Market Competition, Information and Earnings Management," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(5-6), pages 572-599, June.
    2. Jorge Fernández Ruiz, 2002. "Short-Term Performance, Asymmetric Information And Inefficient Corporate Decisions," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 1(2), pages 119-129, Junio 200.
    3. Ingmar Nyman, 2005. "Stock market speculation and managerial myopia," Review of Financial Economics, John Wiley & Sons, vol. 14(1), pages 61-79.
    4. Elie Matta & Jean McGuire, 2008. "Too Risky to Hold? The Effect of Downside Risk, Accumulated Equity Wealth, and Firm Performance on CEO Equity Reduction," Organization Science, INFORMS, vol. 19(4), pages 567-580, August.
    5. Nyman, Ingmar, 2005. "Stock market speculation and managerial myopia," Review of Financial Economics, Elsevier, vol. 14(1), pages 61-79.
    6. Ljungqvist, Alexander & Asker, John & Farre-Mensa, Joan, 2010. "Does the Stock Market Harm Investment Incentives?," CEPR Discussion Papers 7857, C.E.P.R. Discussion Papers.
    7. Anindita Chakravarty & Rajdeep Grewal, 2011. "The Stock Market in the Driver's Seat! Implications for R&D and Marketing," Management Science, INFORMS, vol. 57(9), pages 1594-1609, March.

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