Bonus schemes and trading activity

E.S. Pikulina, L.D.R. Renneboog, J.R. ter Horst, P.N. Tobler

Research output: Contribution to journalArticleScientificpeer-review

Abstract

Little is known about how different bonus schemes affect traders' propensity to trade and which bonus schemes improve traders' performance. We study the effects of linear versus threshold bonus schemes on traders' behavior. Traders buy and sell shares in an experimental stock market on the basis of fundamental and technical information (past share price evolution, realized earnings, analysts' earnings forecasts, and evolution of the market index). We find that linear and threshold bonus schemes have different effects on trading behavior: traders make more transactions but of a smaller size under the threshold than under the linear bonus scheme. Furthermore, transaction frequency significantly decreases when bonus thresholds are reached but only after building in a safety margin. Under the threshold scheme, the traders' performance is lower (even when there are no transaction costs) than under the linear bonus scheme as a consequence of poorer market timing. This is especially the case when earning money by trading is relatively difficult (i.e., under low profitability conditions). Nevertheless, under low profitability conditions, traders seem to collect more information about the relationships between share price and market returns, earnings, and earnings forecasts, put more effort into understanding those relationships, and thus eventually learn to perform better.
Original languageEnglish
Pages (from-to)369-389
JournalJournal of Corporate Finance
Volume29
Early online date2 Oct 2014
DOIs
Publication statusPublished - Dec 2014

Fingerprint

Bonus
Trading activity
Traders
Share prices
Profitability
Information share
Safety
Transaction costs
Earnings forecasts
Trading behavior
Market returns
Stock market
Analysts' earnings forecasts
Trader behavior
Market index
Market timing
Margin
Propensity

Keywords

  • bonus
  • compensation
  • investment decisions
  • trading behavior

Cite this

Pikulina, E.S. ; Renneboog, L.D.R. ; ter Horst, J.R. ; Tobler, P.N. / Bonus schemes and trading activity. In: Journal of Corporate Finance. 2014 ; Vol. 29. pp. 369-389.
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Bonus schemes and trading activity. / Pikulina, E.S.; Renneboog, L.D.R.; ter Horst, J.R.; Tobler, P.N.

In: Journal of Corporate Finance, Vol. 29, 12.2014, p. 369-389.

Research output: Contribution to journalArticleScientificpeer-review

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