Abstract
This paper studies the role of optimal managerial compensation in reducing uncertainty about a manager's reporting objective. I show that, paradoxically, firm owners allow managers with higher propensity to manipulate the short-term stock price to push for higher-powered and more short-term focused equity incentives. Such managers also work harder, and manipulate more, but may not generate higher firm profits. Consistent with existing empirical evidence on top manager pay, the model predicts a positive relationship between manipulation activity and both overall strength and short-term focus of equity incentives, but no relationship between firm value and equity incentives.
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