Earnings-based compensation contracts under asymmetric information

Miglo, Anton (2009) Earnings-based compensation contracts under asymmetric information. Manchester School, 77 (2). pp. 225-243. ISSN 1463-6786

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Abstract

We analyze a model with two-dimensional asymmetric information in which the employer has better information about the fi�rm�'s earnings potential and the employee is subject to moral hazard. The employee'�s contract consists of an annual bonus and stock options. We focus on two issues: how di¤erent degrees of asymmetric information
about short-term earnings versus long-term earnings a¤ect optimal contracts and second, if a signalling equilibrium exists, what information concerning the �rm�s performance pro�le over time can be conveyed by the choice of contract. We show that if the extent of long-term (short-term) asymmetric information is larger, short-term (long-term) compensation prevails. With regard to signalling, we show
that �rms o¤ering more options have higher short-term performance and lower long-term performance. This provides new insights into the structure of earnings-based compensation.

Item Type: Article
Subjects: L100 Economics
N100 Business studies
N200 Management studies
N300 Finance
Divisions: Faculty of Business, Law and Social Sciences > Birmingham City Business School > Dept. Accountancy and Finance
Depositing User: Anton Miglo
Date Deposited: 15 Aug 2018 08:58
Last Modified: 15 Aug 2018 08:58
URI: http://www.open-access.bcu.ac.uk/id/eprint/6239

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