CEO Compensation: Holmström and Tirole (1993) Revisited

Abstract

In this study, we examine a simplified version of Holmström and Tirole (1993) that investigates the role of the stock market in monitoring managerial performance. They demonstrate that the stock price includes performance information that cannot be obtained from the firm's profit data. Therefore, both the firm's liquidation value and stock price are crucial in determining the CEO compensation contract. However, our simplified model shows that only the stock price is used for measuring the CEO's performance. This suggests that the stock price provides sufficient information, making the liquidation value unnecessary in the CEO compensation contract.