Why Do Firms Use Equity-based Pay? Managerial Compensation and Stock Price Informativeness
Charles A. Dice Center Working Paper No. 2019-12
52 Pages Posted: 28 Feb 2018 Last revised: 3 May 2019
Date Written: May 2, 2019
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
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