Value of performance signals under limited liability
Subject
Finance
Publishing details
European Corporate Governance Institute - Finance Working Paper
Authors / Editors
Chaigneau P; Edmans A; Gottlieb D
Biographies
Publication Year
2018
Abstract
This paper studies the value of additional performance signals under limited liability. We show that -- contrary to the informativeness principle -- informative signals may have no value, because the payment cannot be adjusted to reflect the signal realization. We derive necessary and sufficient conditions for a signal to have value under limited liability, and study how valuable signals should be incorporated into the contract. Our results have implications for performance-sensitive debt, pay-for-luck, option repricing, and performance-based vesting. For example, it may be optimal for more options to vest upon a negative signal of effort.
Keywords
Informativeness principle; Contract theory; Principal-agent model; Limited liability; Pay-for-luck; Relative performance evaluation; Vesting; Repricing; Options
Publication Notes
Revised Dec 16 2018
Series Number
439/2014
Series
European Corporate Governance Institute - Finance Working Paper