CEO Compensation and Stock Mispricing: How Do Boards React to Mutual Fund Flow-Driven Price Pressure?

55 Pages Posted: 20 Nov 2012 Last revised: 16 Jan 2019

See all articles by Jie Cai

Jie Cai

Drexel University

Martijn Cremers

University of Notre Dame

Kelsey D. Wei

University of Texas at Dallas

Multiple version iconThere are 2 versions of this paper

Date Written: July 28, 2018

Abstract

We examine how boards decide on CEO compensation depending on how informative stock prices are. In order to mitigate the endogeneity of board decisions, we use extreme mutual fund flow-driven trading pressure as an exogenous shock to stock price informativeness. Consistent with informed boards making economically efficiency decisions, we find that boards rely more on accounting and less on stock performance in setting CEO’s cash compensation when stock prices are temporarily less informative. This finding is more pronounced for those firms with more experienced boards and those without precisely specified formulae for cash compensation, i.e., where boards have more discretion over performance-based compensation.

Keywords: Executive Compensation, Stock Mispricing, Board of Directors, Price Pressure

JEL Classification: G23, G34, M12

Suggested Citation

Cai, Jie and Cremers, K. J. Martijn and Wei, Kelsey D., CEO Compensation and Stock Mispricing: How Do Boards React to Mutual Fund Flow-Driven Price Pressure? (July 28, 2018). Available at SSRN: https://ssrn.com/abstract=2178160 or http://dx.doi.org/10.2139/ssrn.2178160

Jie Cai (Contact Author)

Drexel University ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
215-895-1755 (Phone)
215-895-2955 (Fax)

HOME PAGE: http://faculty.lebow.drexel.edu/CaiJ/

K. J. Martijn Cremers

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Kelsey D. Wei

University of Texas at Dallas ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
9728835978 (Phone)

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