Market efficiency, managerial compensation, and real efficiency

Rajdeep Singh, Vijay Yerramilli

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

We examine how an exogenous improvement in market efficiency, which allows the stock market to obtain more precise information about the firm's intrinsic value, affects the shareholder-manager contracting problem, managerial incentives, and shareholder value. A key assumption in the model is that stock market investors do not observe the manager's pay-performance sensitivity ex ante. We show that an increase in market efficiency weakens managerial incentives by making the firm's stock price less sensitive to the firm's current performance. The impact on real efficiency and shareholder value varies depending on the composition of the firm's intrinsic value.

Original languageEnglish (US)
Pages (from-to)561-578
Number of pages18
JournalJournal of Corporate Finance
Volume29
DOIs
StatePublished - Dec 1 2014

Bibliographical note

Funding Information:
An earlier version of this paper was titled “Can transparency be too much of a good thing?” We gratefully acknowledge the funding provided by the McKnight Foundation for this research. We thank an anonymous referee, Itay Goldstein (Editor), Dirk Hackbarth (Editor), Sugato Bhattacharyya, Philip Bond, Robert Marquez, Sheridan Titman, Denis Yavuz and the seminar participants at the Arizona State University, Financial Intermediation Research Society meetings in Prague and our discussant Joel Shapiro, Financial Management Association European Meetings in Barcelona and our discussant Robert Bliss, Indiana University, and University of Minnesota for their helpful comments.

Publisher Copyright:
© 2014 Elsevier B.V.

Copyright:
Copyright 2014 Elsevier B.V., All rights reserved.

Keywords

  • Market efficiency
  • Pay-performance sensitivity
  • Real efficiency

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