Why Do Firms Use Equity-based Pay? Managerial Compensation and Stock Price Informativeness

Fisher College of Business Working Paper No. 2019-03-012

Charles A. Dice Center Working Paper No. 2019-12

52 Pages Posted: 28 Feb 2018 Last revised: 3 May 2019

See all articles by Benjamin Bennett

Benjamin Bennett

Tulane University - A.B. Freeman School of Business

Gerald T. Garvey

Blackrock

Todd T. Milbourn

Washington University in Saint Louis - Olin Business School

Zexi Wang

Lancaster University

Date Written: May 2, 2019

Abstract

We study the motive of using equity-based pay in executive compensation: the risk-sharing motive versus the performance-measuring motive. The empirical design goes through the relationship between equity-based pay and stock price informativeness (SPI). We find equity-based pay decreases in SPI, which is consistent with the risk-sharing motive but inconsistent with the performance-measuring motive. The SPI effect on compensation is stronger in financially-constrained firms, more diversified firms, and firms with less product market competition. SPI increases pay efficiency through a larger proportion of option pay, fewer perquisites, and greater pay-for-skill. We address potential endogeneity concerns by investigating the changes in compensation of managers switching between firms with different SPI.

Keywords: Executive compensation, Equity-based pay, Stock price informativeness

JEL Classification: G30, J33

Suggested Citation

Bennett, Benjamin and Garvey, Gerald T. and Milbourn, Todd T. and Wang, Zexi, Why Do Firms Use Equity-based Pay? Managerial Compensation and Stock Price Informativeness (May 2, 2019). Fisher College of Business Working Paper No. 2019-03-012, Charles A. Dice Center Working Paper No. 2019-12, Available at SSRN: https://ssrn.com/abstract=3125875 or http://dx.doi.org/10.2139/ssrn.3125875

Benjamin Bennett (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

HOME PAGE: https://sites.google.com/site/benjaminbennettfinance/home

Gerald T. Garvey

Blackrock ( email )

400 Howard Street
San Francisco, CA NSW 94105
United States
4157930208 (Phone)

Todd T. Milbourn

Washington University in Saint Louis - Olin Business School ( email )

1 Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6392 (Phone)
314-935-6359 (Fax)

HOME PAGE: http://www.olin.wustl.edu/faculty/milbourn/

Zexi Wang

Lancaster University ( email )

Lancaster University Management School
Bailrigg
Lancaster, LA1 4YX
United Kingdom

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