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Bonus Schemes and Trading Activity

Author

Listed:
  • Pikulina, E.S.

    (Tilburg University, Center For Economic Research)

  • Renneboog, L.D.R.

    (Tilburg University, Center For Economic Research)

  • Ter Horst, J.R.

    (Tilburg University, Center For Economic Research)

  • Tobler, P.N.

    (Tilburg University, Center For Economic Research)

Abstract

Little is known about how different bonus schemes affect traders' propensity to trade and which bonus schemes improve traders' performance. We study the effects of linear versus threshold bonus schemes on traders' behavior. Traders buy and sell shares in an experimental stock market on the basis of fundamental and technical information (past share price evolution, realized earnings, analysts' earnings forecasts, and evolution of the market index). We find that linear and threshold bonus schemes have different effects on trading behavior: traders make more transactions but of a smaller size under the threshold than under the linear bonus scheme. Furthermore, transaction frequency significantly decreases when bonus thresholds are reached but only after building in a safety margin. Under the threshold scheme, the traders' performance is lower (even when there are no transaction costs) than under the linear bonus scheme as a consequence of poorer market timing. This is especially the case when earning money by trading is relatively difficult (i.e., under low profitability conditions). Nevertheless, under low profitability conditions, traders seem to collect more information about the relationships between share price and market returns, earnings, and earnings forecasts, put more effort into understanding those relationships, and thus eventually learn to perform better.
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Suggested Citation

  • Pikulina, E.S. & Renneboog, L.D.R. & Ter Horst, J.R. & Tobler, P.N., 2013. "Bonus Schemes and Trading Activity," Discussion Paper 2013-030, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:134cd4eb-d638-444b-8106-d7db5162b567
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    as
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    More about this item

    Keywords

    Bonus; Compensation; Investment Decisions; Trading Behavior;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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