Stock Market Information Production and Executive Incentives
Florida International University (FIU) - Department of Finance
The University of Hong Kong - School of Economics and Finance; Peking University - Guanghua School of Management
June 1, 2008
Journal of Corporate Finance, Vol. 14, pp. 484-498, 2008
This paper investigates the effect of stock market microstructure on managerial compensation schemes. We propose and empirically demonstrate that the sensitivity of chief executive officer's (CEO's) compensations to changes in stockholders' value is higher when the stock market facilitates the production and aggregation of private or public information. Using stock trading data and analysts' earnings forecast data, we construct five different measures of the information content in stock prices. These measures, separately and jointly, account for the cross-sectional variations in CEO pay-performance sensitivity well. Our results are robust to the choice of samples, incentive measures, model specifications, and estimation methods. We extend the analysis to nonCEO executives and executive teams and find similar results.
Number of Pages in PDF File: 29
Keywords: Market microstructure, Pay-performance sensitivity, Probability of informed trading (PIN), Analysts' earnings forecasts
JEL Classification: D80, G14, G34, J33
Date posted: March 21, 2005 ; Last revised: March 15, 2011
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