EARNINGS AND PRICE-BASED COMPENSATION CONTRACTS IN THE PRESENCE OF DISCRETIONARY TRADING AND INCOMPLETE CONTRACTING

The paper analyzes the use of reported accounting earnings and price as a basis for compensating a manager when he trades on private information, and share price is set rationally based on privately held information, publicly available and contractible information, and publicly available but noncontractible information. In addition, we analyze the comparative statics of the compensation weights on reported earnings and price with respect to changes in the economy.