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Stock Market Information Production and Executive Incentives

29 Pages Posted: 21 Mar 2005 Last revised: 15 Mar 2011

Qiang Kang

Florida International University (FIU) - Department of Finance

Qiao Liu

The University of Hong Kong - School of Economics and Finance; Peking University - Guanghua School of Management

Date Written: June 1, 2008

Abstract

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

Suggested Citation

Kang, Qiang and Liu, Qiao, Stock Market Information Production and Executive Incentives (June 1, 2008). Journal of Corporate Finance, Vol. 14, pp. 484-498, 2008. Available at SSRN: https://ssrn.com/abstract=687109 or http://dx.doi.org/10.2139/ssrn.687109

Qiang Kang (Contact Author)

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Qiao Liu

The University of Hong Kong - School of Economics and Finance ( email )

School of Economics and Finance
Pokfulam
Hong Kong
Hong Kong
852-2859-1059 (Phone)
852-2548-1152 (Fax)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

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