Job market paper · JEL G12 · G23 · G30 · J30 · M12
Stock Liquidity, Mutual Fund Ownership, and CEO Pay–Performance Sensitivity: Evidence from China
with Konstantinos Baltas and Iftekhar Hasan
In China, where CEO pay responds to accounting performance rather than stock returns, stock liquidity and mutual-fund ownership each causally steepen the slope of pay in ROA — identified from staggered margin-trading eligibility and flow-induced fund trading.
Abstract
We investigate how stock liquidity and mutual-fund ownership affect CEO pay–performance sensitivity. Because CEO pay in China responds to accounting performance rather than to stock returns, the stock price informativeness channel emphasized in the literature is muted, which isolates the governance role of liquidity and fund ownership. Using eligibility for leveraged trading and flow-induced fund trading as exogenous shocks to liquidity and fund ownership, respectively, we find that both causally strengthen the link between CEO pay and accounting performance. Both the causal estimates and a series of additional mechanism tests are consistent with two governance mechanisms: “voice”, whereby funds drawn in by liquidity press for a closer pay–performance link, and “exit”, whereby liquidity lets funds leave at any time, so that the threat of exit prompts boards to tie pay more closely to performance.
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Working paper · JEL G14 · J33 · M12 · M41
CEO Vega, Disclosure Uncertainty, and Accounting Risk Signals
with Yilin Wu
How CEOs’ volatility-based incentives (Vega) affect the uncertainty reflected in firms’ accounting disclosures and audits.
Abstract
We study how vega, the risk-taking incentive in CEO option grants, affects the uncertainty in corporate disclosures and the accounting risk signals that outsiders observe. Our main sample consists of CEOs whose options are granted under multi-year plans that fix either the number or the value of the options granted each year. Under fixed-number plans, but not fixed-value plans, the vega of a new grant moves with industry returns, which neither the board nor the CEO chooses; the contrast between the two plan types therefore makes industry returns an exogenous shock to vega. We find that higher grant-date vega makes the 10-K MD&A and the CEO’s prepared earnings-call remarks more uncertain, as measured sentence by sentence with large language models; makes management earnings guidance less precise; and raises the number and severity of the accounting-quality and risk flags that Audit Analytics records the following year. Within firms, vega is also associated with more and longer critical audit matters.
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Work in progress · sole author · JEL J30 · G30 · M12
Managerial Incentives and Inefficient Investment
Inefficient investment is more pronounced where executives’ option wealth is more closely tied to the stock price — and much of the well-known Delta–capex relation reflects this distortion rather than better investment opportunities.
Abstract
We examine the effect of executive equity incentives on inefficient investment, including over-investment and under-investment, and find that inefficient investment is more pronounced at firms where executives’ wealth from stock option holdings is more closely tied to the firm’s stock price, with the interpretation that such executives face greater stock-price risk so have stronger incentives to distort investment decisions in order to temporarily stabilize or boost stock prices. In addition, we find that these firms tend to exhibit higher capital expenditures, a substantial portion of which can be attributed to inefficient investment.
