Sunday, April 3, 2011
Share Repurchases, Equity Issuances, and Optimal Design of Executive Pay, by Jesse M. Fried, Harvard Law School, was recently posted on SSRN. Here is the abstract:
This paper identifies a potential cost to public investors of tying executive pay to the stock’s future value - even its long-term value. In particular, such an arrangement can incentivize executives to engage in share repurchases (when the current stock price is low) and equity issuances (when the current stock price is high) that reduce “aggregate shareholder value”: the amount of value flowing to all the firm’s shareholders over time. The paper also puts forward a mechanism that ties executive pay to aggregate shareholder value and thereby eliminates the identified distortions.