Abstract

http://ssrn.com/abstract=2037904
 
 

Footnotes (241)



 


 



Compensation as Signaling


Andrew Lund


Pace University School of Law

April 10, 2012

Florida Law Review, Vol. 64, 2012

Abstract:     
Why do scholars and activists pay such close attention to how executive compensation is structured? Appropriate pay structure has traditionally been seen as a mechanism for reducing agency costs imposed on public firms by managers. But as that view has lost explanatory power in recent years, the intense focus on executive pay structure has become difficult to justify. This Article offers a novel way to understand why we continue to care about how public firm managers are paid. Pay structure may be able to signal information about firm quality to capital markets, thereby increasing the pricing accuracy of those markets. This Article suggests two species of signal that pay structure might be thought to transmit. First, firms may signal firm quality by proxy through governance quality — that is, management’s attentiveness to shareholder demands, in this case, those regarding pay structure. Whether those demands are arbitrary (or even value-reducing) matters less for the signaling exercise than that firms are obeying them and are therefore more likely to obey other, perhaps more important, shareholder demands going forward. Second, managers may signal firm quality through their public selection of compensation type, thereby betraying optimism or pessimism about future firm performance based on material, nonpublic information. Ultimately, the ability of pay structure to signal firm quality in either fashion faces significant constraints, making our continued attention puzzling from an economic perspective. Nevertheless, while signaling seems unable to independently justify our devotion to perfecting pay structure, it does help explain firms’ unwillingness to experiment with alternative pay structures. Thus, it suggests that pay structure is an area in which observed outcomes might not be optimal.

Number of Pages in PDF File: 48

Keywords: executive compensation, efficient market, securities law, shareholder power

JEL Classification: J33, K22, G3, G14, M52

Accepted Paper Series


Download This Paper

Date posted: April 10, 2012  

Suggested Citation

Lund, Andrew, Compensation as Signaling (April 10, 2012). Florida Law Review, Vol. 64, 2012. Available at SSRN: http://ssrn.com/abstract=2037904

Contact Information

Andrew Lund (Contact Author)
Pace University School of Law ( email )
78 North Broadway
White Plains, NY 10603
United States
Feedback to SSRN


Paper statistics
Abstract Views: 425
Downloads: 39
Footnotes:  241

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo6 in 0.281 seconds