Abstract

http://ssrn.com/abstract=6383
 
 

Citations



 


 



Stock Market Liquidity and Optimal Management Compensation: Theory and Evidence


Gerald T. Garvey


Blackrock; Barclays Global Investors

Peter L. Swan


University of New South Wales (UNSW); Financial Research Network (FIRN)

Michael S. McCorry


affiliation not provided to SSRN



Abstract:     
Recent research strongly suggests that CEO incentive schemes are not solely determined by the standard considerations of risk-sharing and effort. Here, we examine the effect of the microstructure of the market in which the firm's shares are traded. If informed traders are free to choose both the size of orders they place on the market and the amount of information they gather, an increase in market liquidity makes the stock price more informative and increases the optimal linkage between CEO compensation and shareholder wealth. If on the other hand informed traders are severely restricted in their ability to take positions by considerations such as wealth constraints, increased liquidity reduces the informativeness of share price and dilutes optimal CEO incentives. We find evidence to support the second view in a sample of 329 large US corporations. Our sample contains firms that are listed on either the NYSE or the NASDAQ. The relationship between CEO incentives and the spread is significant and positive only for the NYSE firms, and NYSE firms have significantly higher pay-performance sensitivities. These results suggest a regulatory explanation whereby the monopoly specialist on the NYSE widens the bid-ask spread on small trades and subsidizes more informative large trades because of an affirmative duty to dampen large price movements.

JEL Classification: G30

working papers series


Not Available For Download

Date posted: October 10, 1998  

Suggested Citation

Garvey, Gerald T. and Swan, Peter L. and McCorry , Michael S., Stock Market Liquidity and Optimal Management Compensation: Theory and Evidence. Available at SSRN: http://ssrn.com/abstract=6383

Contact Information

Gerald T. Garvey (Contact Author)
Blackrock ( email )
55 East 52nd Street
New York City, NY 10055
United States
Barclays Global Investors ( email )
45 Fremont Street
San Francisco, CA 94105
United States
Peter Lawrence Swan
University of New South Wales (UNSW) ( email )
School of Banking and Finance
Australian School of Business UNSW
Sydney NSW, 2052
Australia
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia
HOME PAGE: http://www.firn.org.au

Michael S. McCorry
affiliation not provided to SSRN
Feedback to SSRN


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