Dispersed Information and CEO Incentives
Event details
| Date | 03.02.2015 |
| Hour | 12:00 › 13:00 |
| Speaker |
Jan Schneemeier (University of Chicago) |
| Location | |
| Category | Conferences - Seminars |
I measure the social cost of stock-based compensation schemes in a model in which the CEO learns from market prices. In my model, all agents commit a small correlated error when forming their expectations about future productivity. The equilibrium stock price thus aggregates private information with noise. I show that a stock-based compensation scheme leads the CEO to overuse the price information by a factor of three, which in turn makes the excess return and investment growth excessively volatile. I calibrate a DSGE model that embeds this mechanism, and estimate an implied welfare loss of 0.55% of permanent consumption. Surprisingly, if households were given the choice within this model of preserving the status quo or forcing the CEO to ignore all price information, they would choose the latter.
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- Free