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Liquidity, Information Content of Stock Prices and CEO Incentives
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TitleLiquidity, Information Content of Stock Prices and CEO Incentives  
AuthorSu Dongwei and Xiong Jiacai  
OrganizationJinan University; 
Key WordsStock liquidity; CEO incentives; Information content of share prices; Market microstructure; Corporate finance 
AbstractReducing principal-agent problem is an important research question in corporate finance. Prior studies have shown that designing proper CEO incentive contracts and increasing CEO pay-performance sensitivity will help mitigate principal agent problem. This article provides a new perspective based on market microstructure theory and evidence. Using data from publicly listed firms in China, this paper finds that the relationship between CEO pay-performance sensitivity and stock liquidity is of U-shape, and that the information content of stock prices plays a key role in determining this relationship. The findings of this paper indicate that to design proper market-based CEO incentives, firms can work on enhancing their stock liquidity. If shares become more liquid, investors will be willing to spend time and resources to gather firm-specific information, which leads to increases in the information content of share prices. As a result, firms can provide high-power CEO incentives by increasing the weight of stock options in CEO compensation, thus delegate the monitoring of CEO performance to investors in the market. 
Serial NumberWP523 
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