Title

Information-based stock trading and managerial incentives : evidence from China's stock market

Document Type

Journal article

Source Publication

The European Journal of Finance

Publication Date

2014

Volume

20

Issue

7-9

First Page

637

Last Page

656

Keywords

probability of informed trading, compensation

Abstract

This paper uses stock price informativeness, or information-based stock trading, to help explain the pay–performance sensitivity (PPS) of chief executive officer (CEO) compensation in China's listed firms. We argue that higher stock price informativeness, which we measure by the probability of informed trading, helps and encourages shareholders to incentivize the top management team based on stock market performance. The regression results support our argument and show that a higher level of stock price informativeness is associated with higher CEO PPSs. Moreover, the impact of stock price informativeness on CEO incentives is stronger for privately controlled listed firms than it is for state-controlled listed firms. The results also hold when information asymmetry is approximated by the accuracy and dispersion of the earnings forecasts made by financial analysts.

DOI

10.1080/1351847X.2012.672441

Print ISSN

1351847X

E-ISSN

14664364

Publisher Statement

Copyright © 2012 Taylor & Francis

Access to external full text or publisher's version may require subscription.

Additional Information

Special Issue: FIRST CHINESE CAPITAL MARKETS CONFERENCE

Full-text Version

Publisher’s Version

Recommended Citation

Firth, M., Jin, M., & Zhang, Y. (2014). Information-based stock trading and managerial incentives: Evidence from China's stock market. The European Journal of Finance, 20(7-9) : 637-656. doi: 10.1080/1351847X.2012.672441