Title: Stock Market Information Production and Executive Incentives
Reference Number: 1139
Publication Date: April 2005
JEL Classifcation: D80, G14, G34, J33

Qiang Kang
University of Miami

Qiao Liu
The University of Hong Kong


We find that an informationally efficient stock market induces firms to rely more heavily on pay-for-performance schemes. We construct five stock market informativeness measures using stock trading data and analysts' earnings forecast data. These variables, individually and collectively, account for the cross-sectional variation in chief executive officer (CEO) payperformance sensitivity well. Our results are robust to the choice of estimators, samples, time periods, incentive measures, model specifications, and estimation methods. We also analyze the properties of the pay-performance sensitivities of nonCEO executives and executive teams; These have similar properties as CEO pay-performance sensitivity.


Key words: Market microstructure, pay-performance sensitivity, probability of informed trading, analysts' earnings forecast

Last modified: 06/28/2005