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Rev Fin 1992; 5:471-502
© 1992 the Society for Financial Studies

Article

On the efficiency of stock-based compensation

JM Paul
School of Business Administration, University of Michigan, Ann Arbor, MI 48109-1234, USA

Abstract

When the market can observe the profitability of all projects with equal precision, then with stock compensation (i) the weight on any given project in managerial compensation is independent of the marginal productivity of effort in the project; (ii) the projects that are the noisiest indicators of managerial effort receive the most weight in compensation; and (iii) investors have the greatest incentive to collect information about projects that are the noisiest indicators of managerial effort.


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