This paper analyzes the combination of ownership and signal-based bonus offered by investors to the firm’s manager. As an incentive, stock ownership differs from signal-based bonuses. The risk inherent in ownership is unavoidable, while the risk inherent in a signal can be avoided by ignoring the signal. The firm’s ownership structure reflects the tension between sharing signal risk and ownership risk, and motivating the manager. Although the manager could undo incentives by selling stock, neither investors nor the manager have incentive to trade from the unique welfare maximizing ownership structure. The optimal contract to offer the manager is memoryless and unanimously preferred by investors.
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