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The Role of Stock Liquidity in Executive Compensation

The Accounting review, 2012-03, Vol.87 (2), p.537-563 [Peer Reviewed Journal]

2012 American Accounting Association ;Copyright American Accounting Association Mar 2012 ;ISSN: 0001-4826 ;EISSN: 1558-7967 ;DOI: 10.2308/accr-10204 ;CODEN: ACRVAS

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  • Title:
    The Role of Stock Liquidity in Executive Compensation
  • Author: Jayaraman, Sudarshan ; Milbourn, Todd T.
  • Subjects: Cash ; Chief executive officers ; Compensation ; Equity ; Executive compensation ; Executives ; Liquidity ; Performance metrics ; Regression coefficients ; Senior management ; Stock management ; Stock market indices ; Stock options ; Stock prices ; Stock splits ; Studies
  • Is Part Of: The Accounting review, 2012-03, Vol.87 (2), p.537-563
  • Description: We explore the role of stock liquidity in influencing the composition of CEO annual pay and the sensitivity of managerial wealth to stock prices. We find that as stock liquidity goes up, the proportion of equity-based compensation in total compensation increases while the proportion of cash-based compensation declines. Further, the CEO's pay-for-performance sensitivity with respect to stock prices is increasing in the liquidity of the stock. Our main findings are supported by additional tests based on shocks to stock liquidity and two-stage least squares specifications that mitigate endogeneity concerns. Our results are consistent with optimal contracting theories and contribute to the ongoing debate about the increasing trend of both equity-based over cash-based compensation and the sensitivity of total CEO wealth to stock prices rather than earnings.
  • Publisher: Sarasota: American Accounting Association
  • Language: English
  • Identifier: ISSN: 0001-4826
    EISSN: 1558-7967
    DOI: 10.2308/accr-10204
    CODEN: ACRVAS
  • Source: ProQuest Central
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