On the Efficiency of Stock-based Compensation
- 1 July 1992
- journal article
- Published by Oxford University Press (OUP) in The Review of Financial Studies
- Vol. 5 (3) , 471-502
- https://doi.org/10.1093/rfs/5.3.471
Abstract
When the market can observe the profitability of all projects with equal precision, then with stock compensation (i) the weight on any given project in managerial compensation is independent of the marginal productivity of effort in the project; (ii) the projects that are the noisiest indicators of managerial effort receive the most weight in compensation; and (iii) investors have the greatest incentive to collect information about projects that are the noisiest indicators of managerial effort.Keywords
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