Download This PaperThe Role of Stock Liquidity in Executive Compensation
The Accounting Review, Forthcoming
42 Pages Posted: 25 Sep 2009 Last revised: 24 Jul 2011
Date Written: July 22, 2011
Abstract
We explore the role of stock liquidity in influencing the composition of CEO annual pay and the sensitivity of managerial wealth to stock prices. We find that as stock liquidity goes up, the proportion of equity-based compensation in total compensation increases while the proportion of cash-based compensation declines. Further, the CEO’s pay-for-performance sensitivity with respect to stock prices is increasing in the liquidity of the stock. Our main findings are supported by additional tests based on shocks to stock liquidity and two-stage-least squares specifications that mitigate endogeneity concerns. Our results are consistent with optimal contracting theories and contribute to the ongoing debate about the increasing trend of both equity-based over cash-based compensation and the sensitivity of total CEO wealth to stock prices rather than earnings.
Keywords: Compensation, stock liquidity, stock price informativeness, optimal contracting, pay for performance
JEL Classification: G12, M46, J33
Suggested Citation: Suggested Citation
Sudarshan Jayaraman (Contact Author)
Simon Business School, University of Rochester ( email )
Rochester, NY 14627
United States
585-275-3491 (Phone)
University of Rochester - Simon Business School ( email )
Rochester, NY 14627
United States
585-275-3491 (Phone)
Todd T. Milbourn
Southern Methodist University (SMU) - SMU Cox School of Business ( email )
P.O. Box 750333
Dallas, TX 75275-0333
United States