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Managerial incentives and stock price dynamics: an experimental approach

Published online by Cambridge University Press:  14 March 2025

Te Bao Open the ORCID record for Te Bao [Opens in a new window] ,
Edward Halim Open the ORCID record for Edward Halim [Opens in a new window] ,
Charles N. Noussair Open the ORCID record for Charles N. Noussair [Opens in a new window]  and
Yohanes E. Riyanto Open the ORCID record for Yohanes E. Riyanto [Opens in a new window]
Te Bao
Affiliation:
Division of Economics, School of Social Sciences, Nanyang Technological University, Singapore, Singapore
Edward Halim
Affiliation:
Division of Economics, School of Social Sciences, Nanyang Technological University, Singapore, Singapore
Charles N. Noussair*
Affiliation:
Department of Economics, Eller College of Management, The University of Arizona, Tucson, USA
Yohanes E. Riyanto
Affiliation:
Division of Economics, School of Social Sciences, Nanyang Technological University, Singapore, Singapore
*
[email protected]
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Abstract

We investigate experimentally how granting a manager stock ownership and the opportunity to trade shares of a company’s stock influence the manager’s effort and the overall behavior of the market for the company’s shares. In our design, managerial effort affects the fundamental value of the firm. Our findings suggest that endowing a manager with stock does not significantly increase the manager’s effort. When the manager is allowed to trade the company’s shares, however, she tends to accumulate additional shares, increase her effort, and raise company value. In all of our treatments, prices tend to reflect underlying fundamentals, and bubbles are rare.

Keywords

Stock-based compensationManagerial incentivesExperimental financeAsset bubblesAgency problem

JEL classification

D53: Financial Markets D86: Economics of Contract: Theory M1: Business Administration C91: Laboratory, Individual Behavior C92: Laboratory, Group Behavior
Type
Original Paper
Information
Experimental Economics , Volume 24 , Issue 2 , June 2021 , pp. 617 - 648
Copyright
Copyright © 2021 Economic Science Association

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Footnotes

Electronic supplementary material The online version of this article (https://doi.org/10.1007/s10683-020-09675-7) contains supplementary material, which is available to authorized users.

A correction to this article is available online at https://doi.org/10.1007/s10683-021-09704-z.

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