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
Date Written: July 28, 2018
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: Suggested Citation