Passage: 'Corporate governance scholarship has long focused on the principal-agent conflict, in which corporate managers (agents) pursue self-interested objectives that diverge from the wealth-maximization goals of dispersed shareholders (principals). While equity-based executive compensation was devised to align managerial incentives with shareholder returns, it introduced unintended perverse incentives: chief executives frequently orchestrated short-term accounting maneuvers or leveraged share buybacks to temporarily inflate equity prices ahead of option vesting dates.'
What unintended consequence of equity-based compensation is highlighted in the passage?
Answer and explanation
Correct answer: A. Managerial focus on transient stock price manipulation at the expense of sustainable corporate value
- Step 1: Scan the passage for the specific unintended consequences of equity-based executive compensation: the text identifies perverse incentives arising from option structures.
- Step 2: Review the exact behaviors described: chief executives engaged in short-term accounting maneuvers and share buybacks to temporarily boost share prices before option vesting dates.
- Step 3: This behavior represents managerial focus on transient stock price manipulation at the expense of sustainable corporate value.
Answer
Managerial focus on transient stock price manipulation at the expense of sustainable corporate value.
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