How Market Feedback Affects CEO Pay

Stock prices affect various corporate decisions such as the amount of CEO compensation, as emphasized in traditional pay-for-performance studies, and capital investment. However, an unanswered question is whether changes in firms’ stock price in a short window around events related to their corporate governance matter for the compensation of their CEOs. In a new paper, we analyze whether these short-term price changes factor into compensation policies more than suggested by the traditional pay-for-performance argument (which is normally based on stock returns over one year or longer). We refer to decision makers’ learning from changes in stock prices as the market … Read more