Presenter: Naveen Gondhi, INSEAD

Title: Incentivizing Effort and Informing Investment: The Dual Role of Stock Prices

Abstract: Stock prices reflect firm performance and aggregate investor information about investment opportunities. We show that these dual roles are in tension: when prices are more informative about future investment, they are less effective at incentivizing managerial effort. Overall firm value need not increase with price informativeness; both decreasing transparency and allowing for ex-post inefficient investment can increase firm value. We show that standard empirical measures of price efficiency are incomplete and derive testable predictions for the price-sensitivity and composition of managerial compensation

Areas of research: Information economics, market structure, asset pricing

Host: Matthias Lassak