Abstract
There is a standard trade-o ff in contracts between the provision of incentives and insurance. We hypothesize that this trade-o ff influences the precision with which firm performance is measured. We find that firm outcomes are measured less precisely when chance plays a large role in these outcomes. Further, this precision is determined through the choice of shares outstanding. This has several novel implications. Firms with low prices should have volatile cash flows, pay fixed wages, and contract on EPS less frequently. There are additional implications for stock price levels over time and at IPO. We find evidence consistent with the implications.
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