Stock Price Informativeness and Executive Compensation

Abstract

How do changes to stock price informativeness affect the mix of long-term and short-term pay? We answer this question using two exogenous shocks to price informativeness: the reduction in analyst coverage due to closure of brokerage houses and mutual-fund flow driven price pressure. Using the pay duration measure to quantify the extent of long-term pay, we find that firms increase the duration of top executive pay following a decrease in price informativeness. While we document a 10% increase in pay duration following brokerage house closures, the increase in duration following mutual-fund flow driven price pressure is more modest at 2.5%. The increase in pay duration occurs both from a decrease in the cash component of pay and through an increase in the vesting period of stock and option awards. Our evidence is consistent with board of directors reacting to changes in price informativeness in designing executive pay.

Keywords: Executive Compensation, Duration, Stock Price Informativeness

JEL Classification: G30, G39