Executive compensation and short-termist behaviour in speculative markets

Patrick Bolton, José Scheinkman, Wei Xiong

Research output: Contribution to journalArticlepeer-review

263 Scopus citations


We present a multiperiod agency model of stock-based executive compensation in a speculative stock market, where investors have heterogeneous beliefs and stock prices may deviate from underlying fundamentals and include a speculative option component. This component arises from the option to sell the stock in the future to potentially overoptimistic investors. We show that optimal compensation contracts may emphasize short-term stock performance, at the expense of long-run fundamental value, as an incentive to induce managers to pursue actions which increase the speculative component in the stock price. Our model provides a different perspective on the recent corporate crisis than the "rent extraction view" of executive compensation.

Original languageEnglish (US)
Pages (from-to)577-610
Number of pages34
JournalReview of Economic Studies
Issue number3
StatePublished - Jul 2006

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics


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