Why Do Firms Use Equity-Based Pay? Managerial Compensation and Stock Price Informativeness

Benjamin Bennett, Gerald Garvey, Todd Milbourn and Zexi Wang
Additional contact information
Benjamin Bennett: Ohio State University (OSU) - Department of Finance
Gerald Garvey: Blackrock
Todd Milbourn: Washington University in Saint Louis - Olin Business School
Zexi Wang: University of Bern

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: 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.

JEL-codes: G30 J33 (search for similar items in EconPapers)
Date: 2019-05
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-hrm and nep-lma
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2019-12

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