Is An Informative Stock Price Used Less in Incentive Contracts?

37 Pages Posted: 6 May 2019 Last revised: 20 May 2019

See all articles by Peter L. Swan

Peter L. Swan

University of New South Wales (UNSW Sydney; Financial Research Network (FIRN)

Date Written: April 26, 2019


II address the way agency incentives evolve, from listed equity with low liquidity to highly liquid stocks with active informed speculators. I conclude that, as the informativeness of stock price about the manager’s actions improves, less weight needs to be given to both equity and non-price incentives due to this higher quality. Hence managerial pay-performance sensitivity should be lower in more liquid stocks but higher in illiquid start-ups and where face-to-face monitoring is impossible (franchise contracts). The model explains why firms with low inside-ownership and high liquidity increasingly dominate the U.S. market even as the total number of listings declines.

Keywords: Liquidity, Agency, Incentives, Monitoring, Franchise

JEL Classification: G34, J41, J44, L25

Suggested Citation

Swan, Peter Lawrence, Is An Informative Stock Price Used Less in Incentive Contracts? (April 26, 2019). Available at SSRN: or

Peter Lawrence Swan (Contact Author)

University of New South Wales (UNSW Sydney ( email )

School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)

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Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane


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