696. Jesse M. Fried, Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay, 5/11; subsequently published in Texas Law Review, Vol. 89, 2011, 1113-1147.
Abstract: This Article identifies a cost to public investors of tying executive pay to the future value of a firm’s stock—even its long-term value. In particular, such an arrangement can incentivize executives to engage in share repurchases (when the current stock price is low) and equity issuances (when the current stock price is high) that reduce “aggregate shareholder value”: the amount of value flowing to all the firm’s shareholders over time. The Article also puts forward a mechanism that ties executive pay to aggregate shareholder value and thereby eliminates the identified distortions.