Managerial Incentives and Stock Price Manipulation




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    • Lin Peng is with Baruch College, City University of New York. Ailsa Röell is with School of International and Public Affairs, Columbia University, and Centre for Economic Policy Research. We thank Patrick Bolton, Markus Brunnermeier, Donal Byard, Kenneth Carow, Ing-Haw Cheng, N.K. Chidambaran, François Degeorge, Jurgen Dennert, Ingolf Dittman, Alex Edmans, Harrison Hong, Darius Palia, Matthew Pritsker, Jay Ritter, Hyun Shin, Wei Xiong, seminar participants at Baruch College, Columbia University, Fordham University, Rutgers University, Princeton University, Seton Hall University, Shanghai Advanced Institute of Finance, Temple University, Villanova University, Wilfrid Laurier University, and conference participants at the 2008 AEA meetings, 2009 FMA, 2009 Triple Crown Conference, 2009 FIRS, the 2009 First Paris Spring Corporate Finance Conference, and 2011 China International Conference in Finance for helpful comments. We are especially grateful to Campbell Harvey (the Editor) and the anonymous Senior Advisor, Associate Editor, and referee for extensive and constructive suggestions. Peng thanks Princeton University and Röell thanks the Toulouse School of Economics for their hospitality, and Peng also thanks the Eugene Lang Junior Faculty Research Fellowship, the PSC-CUNY Research Foundation, and the Wasserman Endowment for financial support.


We present a rational expectations model of optimal executive compensation in a setting where managers are in a position to manipulate short-term stock prices and the manipulation propensity is uncertain. We analyze the tradeoffs involved in conditioning pay on long- versus short-term performance and show how manipulation, and investors' uncertainty about it, affects the equilibrium pay contract and the informativeness of prices. Firm and manager characteristics determine the optimal compensation scheme: the strength of incentives, the pay horizon, and the use of options. We consider how corporate governance and disclosure regulations can help create an environment that enables better contracting.