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

Author

Listed:
  • Bennett, Benjamin

    (Ohio State University (OSU) - Department of Finance)

  • Garvey, Gerald

    (Blackrock)

  • Milbourn, Todd

    (Washington University in Saint Louis - Olin Business School)

  • Wang, Zexi

    (University of Bern)

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.

Suggested Citation

  • Bennett, Benjamin & Garvey, Gerald & Milbourn, Todd & Wang, Zexi, 2019. "Why Do Firms Use Equity-Based Pay? Managerial Compensation and Stock Price Informativeness," Working Paper Series 2019-12, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2019-12
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    Cited by:

    1. Fujun Lai & Sha Zhu & Qingxiang Feng & Yi Yao, 2021. "Effects of Financial Market Information on Firms’ Productivity Under Operating Pressure and Financial Constraints: Evidence From the Chinese Stock Market," SAGE Open, , vol. 11(4), pages 21582440211, November.

    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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