Naveen Gondhi (INSEAD), will present “Incentivizing Effort and Informing Investment: The Dual Role of Stock Prices" (the paper is joint with Snehal Banerjee and Jesse Davis).
Time and venue: March 21, Tuesday, 11.15 am – 12.30 pm, in QS C-322. RSVP required
Abstract: Stock prices reflect managerial performance and aggregate investor information about investment opportunities. These dual roles are often in tension: when prices are more informative about future opportunities, they may be less effective at incentivizing managerial effort. As a result, firm value can decrease with revelatory price efficiency, but increase with ex-post inefficient investment rules and lower transparency. The interaction of these dual roles has novel implications not only for the performance sensitivity of managerial compensation but also its duration and the optimal allocation of control rights. Finally, we demonstrate that standard empirical measures of price informativeness are incomplete absent information about the firm’s investment opportunities.