Do Informative Stock Prices Simplify Executive Compensation?

Fisher College of Business Working Paper No. 2019-03-007

Charles A. Dice Center Working Paper No.2019-07

50 Pages Posted: 15 Mar 2019 Last revised: 3 Dec 2020

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: December 3, 2020

Abstract

We study the effects of stock price informativeness (SPI) on the complexity of executive compensation. Using textual analysis of SEC proxy statements to construct measures of compensation complexity, we find informative stock prices reduce pay complexity. Using mutual fund redemption as an exogenous decrease in SPI, we find when the redemption pressure is high (SPI is low), CEO pay is more complex and more closely linked to accounting performance and peer firm performance. Compensation complexity leads to more excess pay, more perquisite pay, and lower future ROA. Shareholders show concerns about complex pay and require more frequent Say-on-Pay votes.

Keywords: Compensation complexity, Stock price informativeness, Market monitoring, Proxy statements, Textual analysis

JEL Classification: G14, G30, J33, M12

Suggested Citation

Bennett, Benjamin and Garvey, Gerald T. and Milbourn, Todd T. and Wang, Zexi, Do Informative Stock Prices Simplify Executive Compensation? (December 3, 2020). Fisher College of Business Working Paper No. 2019-03-007, Charles A. Dice Center Working Paper No.2019-07, Available at SSRN: https://ssrn.com/abstract=3347955 or http://dx.doi.org/10.2139/ssrn.3347955

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 )

Level 37, Chifley Tower
2 Chfiley Square
Sydney, NSW 2000
Australia
+61 2 9272 2388 (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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