CEO Compensation and Stock Mispricing: How Do Boards React to Mutual Fund Flow-Driven Price Pressure?
54 Pages Posted: 23 Sep 2015 Last revised: 2 Jun 2017
Date Written: June 1, 2017
We examine whether boards are sufficiently well-informed to make efficient decisions on CEO compensation. In order to mitigate the endogeneity of board decision on CEO compensation, we use mutual fund flow-driven trading pressure as an exogenous shock to stock price informativeness. Consistent with economic efficiency, boards (and particularly those with more experience) rely more on accounting and less on stock performance in setting the CEO bonus when stock prices are temporarily less informative. In addition, boards take advantage of negative price pressure to grant more options, which may benefit the CEOs and lower the reported company accounting costs.
Keywords: Executive Compensation, Stock Mispricing, Board of Directors, Price Pressure
JEL Classification: G23, G34, M12
Suggested Citation: Suggested Citation