Executive compensation in high-growth no-dividend firms

I study managerial compensation in financially constrained firms with high growth opportunities. Such firms can often profitably reinvest their operating incomes and pay no dividends. Absence of reliable performance indicators together with asymmetric information create acute agency problems. Stock-based compensation schemes, notoriously popular during the tech bubble of the 1990s, provide the necessary incentives for the manager to exert costly effort to pursue further growth. However, in line with the previous literature, I find that they may also induce the manager to conceal bad news about the future prospects of the firm, in order to maintain a high stock market valuation. This leads to a substantial overinvestment in the firm's assets, and expands a bubble-like surge in the firm's stock price, followed by an inevitable crash. I find that a stock-based compensation contract that delays payments by several years effectively deters the manager from concealing, while still providing incentives to work hard.