How should performance signals affect contracts?

Chaigneau, P, Edmans, A and Gottlieb, D (2021) How should performance signals affect contracts? Review of Financial Studies. ISSN 0893-9454 (Accepted)

Abstract

The informativeness principle demonstrates that a contract should depend on informative signals. This paper studies how it should do so. Signals that indicate the output distribution has shifted to the left (e.g. weak industry performance) reduce the threshold for the manager to be paid; those that indicate output is a precise measure of effort (e.g. low volatility) decrease high thresholds and increase low thresholds. Surprisingly, "good" signals of performance need not reduce the threshold. Applying our model to performance-based vesting, we show that performance measures should affect the strike price rather than the number of vesting, contrary to practice.

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Item Type: Article
Subject Areas: Finance
Additional Information:

© 2021 Oxford University Press and Society for Financial Studies. This is a pre-copyedited, author-produced version of an article accepted for publication in The Review of Financial Studies following peer review. The version of record 'How should performance signals affect contracts?', Chaigneau P, Edmans A, Gottlieb D. Review of Financial Studies is available online at: [awaiting publisher URL]

Date Deposited: 03 Feb 2021 09:49
Date of first compliant deposit: 20 Jan 2021
Subjects: I > Information
C > Contracts and agency
Last Modified: 06 Feb 2021 08:04
URI: https://lbsresearch.london.edu/id/eprint/1651
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