Stock Market Information Production and Executive Incentives
29 Pages Posted: 21 Mar 2005 Last revised: 15 Mar 2011
Date Written: June 1, 2008
This paper investigates the effect of stock market microstructure on managerial compensation schemes. We propose and empirically demonstrate that the sensitivity of chief executive officer's (CEO's) compensations to changes in stockholders' value is higher when the stock market facilitates the production and aggregation of private or public information. Using stock trading data and analysts' earnings forecast data, we construct five different measures of the information content in stock prices. These measures, separately and jointly, account for the cross-sectional variations in CEO pay-performance sensitivity well. Our results are robust to the choice of samples, incentive measures, model specifications, and estimation methods. We extend the analysis to nonCEO executives and executive teams and find similar results.
Keywords: Market microstructure, Pay-performance sensitivity, Probability of informed trading (PIN), Analysts' earnings forecasts
JEL Classification: D80, G14, G34, J33
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