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

See all articles by Jie Cai

Jie Cai

Drexel University

Martijn Cremers

University of Notre Dame; ECGI

Kelsey D. Wei

University of Texas at Dallas

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2017

Abstract

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

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? (June 1, 2017). Available at SSRN: https://ssrn.com/abstract=2664198 or http://dx.doi.org/10.2139/ssrn.2664198

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

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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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