Opacity and Executive Compensation

47 Pages Posted: 2 Nov 2010 Last revised: 25 Oct 2015

See all articles by Miguel A. Ferreira

Miguel A. Ferreira

Nova School of Business and Economics; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Paul A. Laux

University of Delaware - Alfred Lerner College of Business and Economics

Garen Markarian

WHU - Otto Beisheim School of Management

Date Written: September 12, 2008

Abstract

We develop and test the hypothesis that firms´ 'opacity induces increased risk sharing by managers, in particular by taking more risk in executive compensation contracts. We test this hypothesis in a manner robust to errors-in-variables bias and reverse-causality by using institutional trading as an instrument for 'opacity. Consistent with the hypothesis, we find a positive relation between pay-performance sensitivity and measures of the opacity of financial reporting and stock prices. Our findings suggest that institutional trading can act as a substitute for risky executive compensation by limiting opacity.

Keywords: Arbitrage, Institutional investors, Executive compensation, Corporate governance, Information content of stock prices

JEL Classification: M41, M47, J33, G32, D82

Suggested Citation

Ferreira, Miguel Almeida and Laux, Paul A. and Markarian, Garen, Opacity and Executive Compensation (September 12, 2008). Available at SSRN: https://ssrn.com/abstract=1267305 or http://dx.doi.org/10.2139/ssrn.1267305

Miguel Almeida Ferreira

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Paul A. Laux

University of Delaware - Alfred Lerner College of Business and Economics ( email )

Office 306 Purnell Hall
Newark, DE 19716
United States
302-831-6598 (Phone)
302-831-3061 (Fax)

Garen Markarian (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

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