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

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.

• 저널Management Science · 56(4) · 682–698
• 토픽Financial Markets and Investment Strategies · Finance
• DOI10.1287/mnsc.1090.1128
• 저자Qiang Kang, Qiao Liu