MANAGERS' COMPENSATION AND MISREPORTING: A COSTLY STATE VERIFICATION APPROACH |
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| Authors: | ANGELO BAGLIONI and LUCA COLOMBO |
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| Institution: | Baglioni:;Associate Professor of Economics, Istituto de Economia e Finanza, UniversitàCattolica, Largo A. Gemelli 1, I-20123 Milano, Italy. Phone +39-02-7234-4024, Fax +39-02-7234-2781, E-mail
Colombo:;Associate Professor of Economics, Istituto de Economia e Finanza, UniversitàCattolica, Largo A. Gemelli 1, I-20123 Milano, Italy. Phone +39-02-7234-2637, Fax +39-02-7234-2781, E-mail |
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| Abstract: | We look for the optimal shareholder-manager contract leading to high effort and truthful revelation of firm performance. This twofold incentive compatibility constraint calls for a convex compensation scheme (a fixed wage plus a stock option) coupled with a state contingent audit. In order to reduce expected verification costs, an optimal stock option plan assigns the manager a large number of options with high strike price. It is suggested that focusing the audit activity (and supervision) on the exercise of stock option packages is a better solution to the problem of misreporting than giving up stock options as a compensation tool. ( JEL D82, G30, M40, M52) |
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