Market-Based Executive Compensation Contract under Endogenous Information Acquisition

Abstract

The study investigates how a publicly traded firm's liquidation value and stock price are used in an executive compensation contract when information acquisition in the asset market is endogenized. If the inside owner offers marketbased compensation contract to the risk-averse manager, the inside owner expects higher utility than when stock prices are excluded from the contract. If information cost displays an intermediate value, changes in the exogenous parameters generate the direct effect and the indirect effect via the information market. Finally, we find that the market-based compensation contract contributes to the increase of social welfare.