Abstract - Journal of Finance and Marketing (2020) Volume 4, Issue 6
Banking Market Structure, Liquidity Needs and Industrial Volatility
The traditional view on CEO pay suggests that the use of equity?
based incentives (e.g., stocks and options) should increase when
stock prices become more informative about managerial action.
In this paper, we show this is only true in the relative sense, when
comparing with CEOs non? equity?based incentives (e.g., bonus).
We confirm our model s prediction to show that the use of equity?
based incentives actually falls when institutional traders impound
more information in stock prices. In other words, these two mechanisms are substitutes. These predictions are crystallized by our
empirical results, focusing on S&P 1,500 firms from 1992?2007.
Despite the lower use of equity?based incentives and even lower
still use of bonus incentives, the CEO works harder and her total
compensation increases, as suggested by our model. Our paper not
only helps clarify the relation between CEO incentives and price
efficiency due to informed trading, but also utilizes a new way to
infer price informativeness from the number of institutional informed traders as well as the magnitude of their trades from a
swing measure of informed trading. In its first application to the
United States, we show that the swing measure can be inferred
from SEC 13 f filings and is robust to a number of tests. Author(s): Jiaren Pang