Residual Income-Based Compensation Plans for Controlling Investment Decisions Under Sequential Private Information

2007 ◽  
Vol 53 (3) ◽  
pp. 495-507 ◽  
Author(s):  
Thomas Pfeiffer ◽  
Georg Schneider
Keyword(s):  
Private Information ◽  
Investment Decisions ◽  
Residual Income ◽  
Compensation Plans

scholarly journals Performance-Based Compensation and Firm Value—Experimental Evidence

2015 ◽  
Vol 29 (4) ◽  
pp. 777-798 ◽  
Author(s):  
Glenn M. Pfeiffer ◽  
Timothy W. Shields
Keyword(s):  
Private Information ◽  
Stock Prices ◽  
Firm Value ◽  
Data Availability ◽  
Equity Prices ◽  
Market Prices ◽  
Compensation Plans ◽  
Price Reactions ◽  
Performance Based Compensation ◽  
The Impact

SYNOPSISWe study equity price reactions to compensation contracting in experimental markets. Motivated by research reporting positive price reactions to adoption of performance-based compensation plans for executive managers, but postulating competing reasons as to why, we design an experiment that allows us to manipulate variables separately to examine the effect of adverse selection and moral hazard on equity prices. We find that managers select contracts based on their private information, sometimes differing from predicted choices, and that private information is conveyed to the market by the choice of compensation contract and is reflected in stock prices. We refer to this as the sorting effect. Additionally, we find that managers do not always exert costly effort in spite of favorable incentives to do so. The design also allows us to assess if the market rationally prices managers' actual choices. We find market prices are consistent with the empirically observed manager choices. Our results imply that to properly assess the impact of compensation plan on market prices, the sorting, as well as the incentive effects of compensation contracts, should be considered, and that the market anticipates errors in managers' choices.JEL Classifications: C92; D82; G12; J33; M52.Data Availability: Available upon request.

Austerity*

2020 ◽  
Author(s):  
Harris Dellas ◽  
Dirk Niepelt
Keyword(s):  
Interest Rate ◽  
Current Account ◽  
Private Information ◽  
Investment Decisions ◽  
Borrowing Constraints ◽  
Current Consumption ◽  
Separating Equilibrium ◽  
The Current Account

Abstract We study the optimal debt and investment decisions of a sovereign with private information. The separating equilibrium is characterized by a cap on the current account. A sovereign repays debt amount due that exceeds default costs in order to signal creditworthiness and smooth consumption. Accepting funding conditional on investment/reforms relaxes borrowing constraints, even when investment does not create collateral, but it depresses current consumption. The model contains the signalling elements emphasized by creditors in the Greek austerity programs and is consistent with the reduction in the loans issued by Greece and their interest rate following the 2015 election.

Overconfidence bias and stock market volatility in Ghana: testing the rationality of investors in the Covid-19 era

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Raphael Kuranchie-Pong ◽  
Joseph Ato Forson
Keyword(s):  
Stock Market ◽  
Granger Causality ◽  
Private Information ◽  
Trading Volume ◽  
Variance Estimation ◽  
Public Information ◽  
Investment Decisions ◽  
Stock Market Volatility ◽  
Content Type ◽  
Overconfidence Bias

PurposeThe paper tests the overconfidence bias and volatility on the Ghana Stock Exchange (GSE) during the pre-Covid-19 pandemic and Covid-19 pandemic period.Design/methodology/approachThe study employs pairwise Granger causality to test the presence of overconfidence bias on the Ghana stock market as well as GARCH (1,1) and GJR-GARCH (1, 1) models to understand whether overconfidence bias contributed to volatility during pre-Covid-19 pandemic and Covid-19 pandemic period. The pre-Covid-19 pandemic period spans from January, 2019 to December, 2019, and Covid-19 pandemic period spans from January, 2020 to December, 2020.FindingsThe paper finds a unidirectional Granger causality running from weekly market returns to weekly trading volume during the Covid-19 pandemic period. These results indicate the presence of overconfidence bias on the Ghana stock market during the Covid-19 pandemic period. Finally, the conditional variance estimation results showed that excessive trading of overconfident market players significantly contributes to the weekly volatility observed during the Covid-19 pandemic period.Research limitations/implicationsThe empirical findings demonstrate that market participants on the GSE exhibit conditional irrationality in their investment decisions during the Covid-19 pandemic period. This implies investors overreact to private information and underreact to available public information and as a result become overconfident in their investment decisions.Practical implicationsFindings from this paper show that there is evidence of overconfidence bias among market players on the GSE. Therefore, investors, financial advisors and other market players should be educated on overconfidence bias and its negative effect on their investment decisions so as to minimize it, especially during the pandemic period.Originality/valueThis study is a maiden one that underscores investors’ overconfidence bias in the wake of a pandemic in the Ghanaian stock market. It is a precursor to the overconfidence bias discourse and encourages the testing of other behavioral biases aside what is understudied during the Covid-19 pandemic period in Ghana.

Long-Run Investment Decisions, Operating Performance, and Shareholder Value Creation of Firms Adopting Compensation Plans Based on Economic Profits

2005 ◽  
Vol 40 (4) ◽  
pp. 721-745 ◽  
Author(s):  
Chris E. Hogan ◽  
Craig M. Lewis
Keyword(s):  
Value Creation ◽  
Choice Model ◽  
Operating Performance ◽  
Investment Decisions ◽  
Investment Behavior ◽  
Past Performance ◽  
Compensation Plans ◽  
Economic Profit ◽  
Long Run ◽  
Significant Performance

AbstractFor firms that adopted economic profit plans between 1983 and 1996, we document changes in investment behavior that lead to improvements in operating performance and growth opportunities relative to these firms' past performance. The improvements, however, are similar to those realized by a set of non-adopting control firms that are selected on the basis of a logistic regression model of adoption choice. We then consider the possibility that some firms are better candidates for economic profit plans than others and classify adopters according to whether they make anticipated or surprising choices based on the adoption choice model. We find that anticipated adopters make changes in investment behavior that reduce invested capital and allow them to become more profitable than a sample of control firms that were expected to adopt but chose to continue using a traditional plan. A similar analysis of surprise adopters does not reveal significant performance differences relative to a sample of anticipated non-adopters. The classification analysis suggests that economic profit plans work best for firms that are expected to adopt such plans based on pre-adoption operating, organizational, financial, and compensation characteristics.

Investment considerations and impressions of integrated reporting

2018 ◽  
Vol 9 (1) ◽  
pp. 2-28 ◽  
Author(s):  
Pei-Chi Kelly Hsiao ◽  
Martin Kelly
Keyword(s):  
Private Information ◽  
Firm Value ◽  
Information Needs ◽  
Investment Decisions ◽  
Capital Allocation ◽  
Structured Interviews ◽  
Integrated Reporting ◽  
Content Type ◽  
Investment Appraisal ◽  
Reporting Framework

Purpose Integrated reporting (IR) aims to improve the quality of information available to capital providers. While IR is associated with decreases in investor uncertainty and increases in firm value, it is unclear how IR information directly influences investment decisions. This paper aims to investigate the investment considerations of Taiwanese investors and their initial impressions of the International Integrated Reporting Framework (IIRC Framework). In doing so, this study examines the relationships between investment considerations and the IIRC Framework’s concepts. Design/methodology/approach Semi-structured interviews were undertaken with 16 investors in Taiwan. Thematic analysis was used to analyse the data collected. Findings In addition to economic and financial outlook, competitive advantages and ownership structure, Taiwanese investors emphasise management credibility as an important factor that influences investment decisions. Investors are reliant on private information sources and quantitative data. Sustainability disclosures and sustainability performance beyond legal requirements are often not considered. Taiwanese investors lack awareness of the IIRC Framework and are sceptical about the premise that integrated reports can provide information material to investment appraisal. The assertion that integrated reports reduce information asymmetry and influence investment decisions has to be treated with caution. Research limitations/implications Self-selection bias and a potential lack of transferability in the findings are issues inherent in the research method and sample used. Practical implications IR information needs to be frequently updated rather than disclosed in a periodic report. Furthermore, integrated reports need to demonstrate a direct link between non-financial performance and financial value creation. Social implications Mandating the supply of integrated reports is unlikely to influence investors’ capital allocation decisions unless investor demand is a driver of the regulation. Originality/value This study is one of the few to investigate IR from the investor’s perspective. Observations from this preliminary study warrant further investigations into the relevance of IR to investment communities globally.

Financial Reporting Discretion, Managerial Myopia, and Investment Efficiency

2021 ◽  
Author(s):  
Xu Jiang ◽  
Baohua Xin
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Private Information ◽  
Investment Decisions ◽  
Unintended Consequence ◽  
Investment Efficiency ◽  
Net Benefit ◽  
Financial Reports ◽  
Ex Post ◽  
Managerial Myopia

We explicitly model financial reporting discretion and earnings management in an investment setting where managers have incentives to behave myopically. We show that, when managers are sufficiently but not excessively myopic, granting them some discretion over the mandatory financial reports can lead to better investment decisions. This finding contrasts with the conventional argument that financial reporting discretion facilitates earnings management and exacerbates managerial myopia, leading to inefficient investments. Costly earnings management, while offering managers some ex post protection against bad luck by decreasing the incidence of low financial reports, reduces the expected net benefit of high financial reports ex-ante. Consequently, managers with negative private information find it too costly to mimic those with positive private information, facilitating separation of managers through efficient investment. Thus, curbing managerial myopia by removing or overly restricting earnings management may have the unintended consequence of impairing investment efficiency.

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