Information-Based Stock Trading, Executive Incentives, and the Principal-Agent Problem

• 成果类型: Article
• 署名作者: Kang, Qiang; Liu, Qiao
• 署名单位: University of Miami; University of Hong Kong
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.1090.1128
• 发表日期: 2010
• 页码: 682-698
• 关键词: risk-incentive trade-off; endogenous information-based trading; PAY-PERFORMANCE SENSITIVITY; adjusted pin; calibration

摘要

We examine the role of information-based stock trading in affecting the risk-incentive relation. By incorporating an endogenous informed trading into an optimal incentive contracting model, we analytically show that, apart from reducing incentives, a greater risk increases the level of information-based trading, which consequently enhances executive incentives and offsets the negative risk-incentive relation. We calibrate the model and find that the economic magnitude of this incentive-enhancement effect is significant. Our empirical test using real-world executive compensation data lends strong support to the model prediction. Our results suggest that principals (boards of directors) should consider underlying stock trading characteristics when structuring executive incentives.