Managerial incentives and stock price dynamics: an experimental approach

We investigate experimentally how granting a manager stock ownership and the opportunity to trade shares of a company’s stock influence the manager’s effort and the overall behavior of the market for the company’s shares. In our design, managerial effort affects the fundamental value of the firm. Our findings suggest that endowing a manager with stock does not significantly increase the manager’s effort. When the manager is allowed to trade the company’s shares, however, she tends to accumulate additional shares, increase her effort, and raise company value. In all of our treatments, prices tend to reflect underlying fundamentals, and bubbles are rare.