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Information-based stock trading and managerial incentives: evidence from China's stock market

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  • Michael Firth
  • Man Jin
  • Yuanyuan Zhang

Abstract

This paper uses stock price informativeness, or information-based stock trading, to help explain the pay-performance sensitivity (PPS) of chief executive officer (CEO) compensation in China's listed firms. We argue that higher stock price informativeness, which we measure by the probability of informed trading, helps and encourages shareholders to incentivize the top management team based on stock market performance. The regression results support our argument and show that a higher level of stock price informativeness is associated with higher CEO PPSs. Moreover, the impact of stock price informativeness on CEO incentives is stronger for privately controlled listed firms than it is for state-controlled listed firms. The results also hold when information asymmetry is approximated by the accuracy and dispersion of the earnings forecasts made by financial analysts.

Suggested Citation

  • Michael Firth & Man Jin & Yuanyuan Zhang, 2014. "Information-based stock trading and managerial incentives: evidence from China's stock market," The European Journal of Finance, Taylor & Francis Journals, vol. 20(7-9), pages 637-656, September.
    • Handle: RePEc:taf:eurjfi:v:20:y:2014:i:7-9:p:637-656
    DOI: 10.1080/1351847X.2012.672441
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    Cited by:

    1. Man Jin & Shunan Zhao & Subal C. Kumbhakar, 2020. "Information asymmetry and leverage adjustments: a semiparametric varying‐coefficient approach," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 183(2), pages 581-605, February.
    2. Man Jin & Huiting Tian & Subal C. Kumbhakar, 2020. "How to survive and compete: the impact of information asymmetry on productivity," Journal of Productivity Analysis, Springer, vol. 53(1), pages 107-123, February.

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