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Performance-Based Compensation and Firm Value: Experimental evidence

Author

Listed:
  • Glenn Pfeiffer

    (Argyros School of Business and Economics, Chapman University, USA)

  • Timothy Shields

    (Argyros School of Business and Economics, Chapman University, USA)

Abstract

Motivated by research reporting positive price reactions to adoption of performance-based compensation plans, we examine price reactions to compensation contracting in experimental markets. The design allows us to manipulate variables separately and study issues of adverse selection (sorting) and moral hazard (incentives). We find that managers select contracts based on their private information, and that information is conveyed to the market by the choice of compensation contract and reflected in price. Additionally, we find that managers do not always exert costly effort in spite of favorable incentives to do so (shirking). As a result, the market is skeptical of incentive benefits. Thus, while we find evidence of overbidding in some treatments, we find that market prices are consistent with private information revelation but undervalue incentive benefits.

Suggested Citation

  • Glenn Pfeiffer & Timothy Shields, 2012. "Performance-Based Compensation and Firm Value: Experimental evidence," Working Papers 12-17, Chapman University, Economic Science Institute.
    • Handle: RePEc:chu:wpaper:12-17
    as

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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    compensation; experimental markets; sorting; incentives;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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