Managerial Expertise, Private Information, and Pay-Performance Sensitivity
Citations
Cites background from "Managerial Expertise, Private Infor..."
...The detailed proof of Proposition 2 can refer to the appendix of Dutta [20]....
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...We assume that FðhÞ=f ðhÞ is increasing and the inverse hazard rate ð1 FðhÞÞ=f ðhÞ is decreasing, which are common monotonicity conditions in private information agency literature [20]....
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Cites background or result from "Managerial Expertise, Private Infor..."
...This observation is consistent with Cheng and Powers (2008), and Dutta (2008) finding that performance and pay-performance sensitivity are positively correlated....
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...This finding is different from previous accounting literature stating compensation is negatively related with cost when agent is risk averse (Dutta 2008; Holmstrom 1979; Holmstrom and Milgrom 1991)....
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...This finding complies with Dutta (2008) that risk and incentives are positively associated with general managerial expertise and Bernardo et al. (2001) that “… optimal sharing-rule increases in importance of managerial effort…” In addition, the larger is the underwriting risk factor, the higher…...
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...This finding is different from previous accounting literature stating compensation is negatively related with cost when agent is risk averse (Dutta 2008; Holmstrom 1979; Holmstrom and Milgrom 1991). In Holmstrom & Milgrom (1991) framework, the agent is risk averse so shifting the risk to the agent entails an efficiency cost....
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...242 S. Gao and J. M. Plehn-Dujowich This finding is different from previous accounting literature stating compensation is negatively related with cost when agent is risk averse (Dutta 2008; Holmstrom 1979; Holmstrom and Milgrom 1991)....
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References
5,678 citations
"Managerial Expertise, Private Infor..." refers background in this paper
...As shown in the appendix, the incentive compatibility condition in combination with the participation constraints implies that the manager’s certainty equivalent must take the form: CE(θ) = ∫ θ θ γ · β(u) du (11) 13See Holmstrom and Milgrom (1991)....
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4,859 citations
"Managerial Expertise, Private Infor..." refers background in this paper
...Hall and Liebman (1998) examine more recent data on executive compensation, and find that the average pay-performance sensitivity is somewhat higher than that documented in Jensen and Murphy (1990)....
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...In a seminal paper, Jensen and Murphy (1990) empirically investigates the extent to which ceo compensation is tied to firm performance. They find a statistically significant, but economically small, relationship between ceo pay and firm performance. This evidence has raised concerns about whether the relation between pay and performance is strong enough.(6) Another well-documented empirical regularity in the executive compensation literature is that pay-performance sensitivities tend to vary quite widely across firms and industries.(7) My paper generates some potential explanations for these empirical findings. First, it shows that when managers have asymmetric information about their skills and those skills are largely firm-specific, managers will optimally receive weaker incentives than those predicted by standard moral hazard agency models. Second, my paper shows that optimal pay-performance sensitivities will vary systematically with managerial expertise. In addition, my analysis generates predictions about how pay-performance sensitivities relate to firm and industry characteristics, the extent of private information, and the nature of managers’ outside opportunities. These results can help explain some of the cross-sectional heterogeneity observed in executive compensation contracts. My model presumes that the manager’s opportunity wage is increasing in his type. This is one of the key distinctions between my model and the earlier work in the asymmetric information agency literature. Dutta (2003), Lewis and Sappington (1989a), and Maggi and Rodriguez-Clare (1995) also consider settings in which the agent’s reservation utility depends on his type. The last two papers consider regulation settings in which a regulated firm’s reservation price is negatively related to its marginal cost of production. As a consequence, the firm faces countervailing reporting incentives, i.e., it would like to overstate its marginal cost to receive a bigger cost reimbursement, but would prefer to understate its marginal cost in order to convince the regulator that its reservation price is high. While my paper (6)Jensen and Murphy (1990) find that the average ceo receives only $3....
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...In a seminal paper, Jensen and Murphy (1990) empirically investigates the extent to which ceo compensation is tied to firm performance....
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...In a seminal paper, Jensen and Murphy (1990) empirically investigates the extent to which ceo compensation is tied to firm performance. They find a statistically significant, but economically small, relationship between ceo pay and firm performance. This evidence has raised concerns about whether the relation between pay and performance is strong enough.(6) Another well-documented empirical regularity in the executive compensation literature is that pay-performance sensitivities tend to vary quite widely across firms and industries.(7) My paper generates some potential explanations for these empirical findings. First, it shows that when managers have asymmetric information about their skills and those skills are largely firm-specific, managers will optimally receive weaker incentives than those predicted by standard moral hazard agency models. Second, my paper shows that optimal pay-performance sensitivities will vary systematically with managerial expertise. In addition, my analysis generates predictions about how pay-performance sensitivities relate to firm and industry characteristics, the extent of private information, and the nature of managers’ outside opportunities. These results can help explain some of the cross-sectional heterogeneity observed in executive compensation contracts. My model presumes that the manager’s opportunity wage is increasing in his type. This is one of the key distinctions between my model and the earlier work in the asymmetric information agency literature. Dutta (2003), Lewis and Sappington (1989a), and Maggi and Rodriguez-Clare (1995) also consider settings in which the agent’s reservation utility depends on his type. The last two papers consider regulation settings in which a regulated firm’s reservation price is negatively related to its marginal cost of production. As a consequence, the firm faces countervailing reporting incentives, i.e., it would like to overstate its marginal cost to receive a bigger cost reimbursement, but would prefer to understate its marginal cost in order to convince the regulator that its reservation price is high. While my paper (6)Jensen and Murphy (1990) find that the average ceo receives only $3.25 for every $1000 increase in firm value. Hall and Liebman (1998) examine more recent data on executive compensation, and find that the average pay-performance sensitivity is somewhat higher than that documented in Jensen and Murphy (1990)....
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...In a seminal paper, Jensen and Murphy (1990) empirically investigates the extent to which ceo compensation is tied to firm performance. They find a statistically significant, but economically small, relationship between ceo pay and firm performance. This evidence has raised concerns about whether the relation between pay and performance is strong enough.(6) Another well-documented empirical regularity in the executive compensation literature is that pay-performance sensitivities tend to vary quite widely across firms and industries.(7) My paper generates some potential explanations for these empirical findings. First, it shows that when managers have asymmetric information about their skills and those skills are largely firm-specific, managers will optimally receive weaker incentives than those predicted by standard moral hazard agency models. Second, my paper shows that optimal pay-performance sensitivities will vary systematically with managerial expertise. In addition, my analysis generates predictions about how pay-performance sensitivities relate to firm and industry characteristics, the extent of private information, and the nature of managers’ outside opportunities. These results can help explain some of the cross-sectional heterogeneity observed in executive compensation contracts. My model presumes that the manager’s opportunity wage is increasing in his type. This is one of the key distinctions between my model and the earlier work in the asymmetric information agency literature. Dutta (2003), Lewis and Sappington (1989a), and Maggi and Rodriguez-Clare (1995) also consider settings in which the agent’s reservation utility depends on his type....
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4,650 citations
3,619 citations
3,602 citations
"Managerial Expertise, Private Infor..." refers background in this paper
...10For asymmetric information models of procurement and regulation, see Baron and Myerson (1982), Laffont and Tirole (1984), and Laffont and Tirole (1993)....
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