Working Paper: NBER ID: w12107
Authors: Patrick Bolton; Jose Scheinkman; Wei Xiong
Abstract: We argue that the root cause behind the recent corporate scandals associated with CEO pay is the technology bubble of the latter half of the 1990s. Far from rejecting the optimal incentive contracting theory of executive compensation, the recent evidence on executive pay can be reconciled with classical agency theory once one expands the framework to allow for speculative stock markets.
Keywords: Executive Compensation; Speculative Markets; Technology Bubble; Agency Theory
JEL Codes: G1; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| technology bubble of the late 1990s (E32) | rise in CEO compensation (M12) |
| speculative stock markets (G10) | greater short-term orientation in executive pay contracts (M12) |
| differences of opinion among investors (G11) | incentives for earnings manipulation (M52) |
| incentives for earnings manipulation (M52) | affects executive compensation structures (M52) |
| speculative markets (G10) | conflict between current and future shareholders (G34) |
| current shareholders incentivize CEOs (G34) | manipulate earnings for immediate gains (G14) |
| manipulate earnings for immediate gains (G14) | affects long-term firm value (G32) |
| presence of naive investors (G40) | contributes to overvaluation of stocks (G41) |
| CEO's duty of loyalty to current shareholders (G34) | aligns incentives with short-term performance metrics (M52) |
| speculative behaviors (D84) | influences structure of compensation contracts (J33) |
| agency problems (G34) | exacerbated by speculative nature of the market (D84) |
| speculative nature of the market (G10) | encourages earnings manipulation (M48) |