Market-Based CEO Compensation and Ambiguous Signal in Asset Market

Abstract

We develop a market-based CEO compensation contract model, in which the informed trader in the asset market receives noisy private signal with ambiguity. In the equilibrium compensation contract, inside owners does not refer to the firm’s liquidation value when monitoring the performance of the manager once the asset price is incorporated in the contract. We analyze the effects of ambiguity in the asset market on the manager’s effort level and the compensation contract. In the presence of ambiguity, the manager takes more efforts and the inside owner provides a higher weight on the asset price in the contract.