CEO incentive compensation and stock liquidity
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We document that the CEO pay-for-performance incentive positively predicts firm’s stock liquidity. The evidence is consistent with the hypothesis that, to mitigate their undiversified price risk and reduce the transaction costs, CEOs with high pay-for-performance incentive compensations exert extra efforts in shaping firms’ information environment to improve stock liquidity. We further identify three internal and two external channels through which incentivized CEOs stimulate firms’ stock liquidity. Specifically, we find that firms with highly incentivized CEOs tend to provide earnings guidance, file more readable 10-K reports, and perform more stock splits. In addition, these firms attract larger analyst following and have lower earnings forecast dispersions.
KeywordsCEO incentive compensation Stock liquidity 10-K reports Stock split Earnings management
JEL ClassificationG12 G32 J33
We would like to thank the anonymous referee, Greg Eaton, Ramesh Rao, Yanjian Zhu, Track Chairs of FMA best paper awards of the FMA annual conference 2016, participants of the SWFA annual conference 2015, the FMA annual conference 2016, and seminar participants at Oklahoma State University and Zhejiang University for helpful comments.
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