Why am I not surprised?
An interesting new article in the Nov 2010 QJE
Stock-Based Compensation and CEO (Dis)Incentives
Efraim Benmelech, Eugene Kandel, Pietro Veronesi
The use of stock-based compensation as a solution to agency problems between shareholders and managers has increased dramatically since the early 1990s. We show that in a dynamic rational expectations model with asymmetric information, stock-based compensation not only induces managers to exert costly effort, but also induces them to conceal bad news about future growth options and to choose suboptimal investment policies to support the pretense. This leads to a severe overvaluation and a subsequent crash in the stock price. Our model produces many predictions that are consistent with the empirical evidence and are relevant to understanding the current crisis.
As Gomer Pyle would say: Surprise, surprise, surprise.
Excuse my ignorance. But does this mean that the “fat cats” will have to become cost effective, productive and honest? Surely that will put a lot of sociopaths out of work!
Question. How come it took this long and a GFC for the economic architects of the world to realise this? Should they be looking for a new line of work also?
My answers to your questions – and they’re only mine are.
1) But does this mean that the “fat cats” will have to become cost effective, productive and honest? No.
2) Surely that will put a lot of sociopaths out of work! Perhaps.
3) How come it took this long and a GFC for the economic architects of the world to realise this? There are no “economic architects of the world”.
4) Should they be looking for a new line of work also? See answer to question three. Problem solved, which is to say, apparent issue identified as non-issue.