Stock Price Informativeness and Executive Compensation

67 Pages Posted: 13 Sep 2015 Last revised: 26 Oct 2017

See all articles by Shashwat Alok

Shashwat Alok

Indian School of Business (ISB), Hyderabad

Felipe Cortes

D'Amore-McKim School of Business-Northeastern University

Radhakrishnan Gopalan

Washington University in St. Louis - John M. Olin Business School

Date Written: December 2016

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

Suggested Citation

Alok, Shashwat and Cortes, Felipe and Gopalan, Radhakrishnan, Stock Price Informativeness and Executive Compensation (December 2016). Indian School of Business WP, Available at SSRN: https://ssrn.com/abstract=2659167 or http://dx.doi.org/10.2139/ssrn.2659167

Shashwat Alok

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India
914023187188 (Phone)

Felipe Cortes (Contact Author)

D'Amore-McKim School of Business-Northeastern University ( email )

360 Huntington Ave
419F Hayden Hall
Boston, MA 02140
United States

Radhakrishnan Gopalan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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