Exploring the Role of Stock Liquidity in Executive Equity Compensation Design for S&P 1500 Firms

• In Event: Executive Compensation and Advisory Fees

Abstract

We examine the role of stock liquidity on executive equity compensation design. For a sample of S&P 1500 firms in 2007-2016, we find that as stock liquidity goes up the proportion of options in equity compensation decreases while the proportion of stock awards increases. The results of this study are consistent with the theoretical predictions of Feltham and Wu (2001). Our empirical findings are supported by multivariate analyses using alternative measures of stock liquidity and a two-stage least square specification that alleviates endogeneity concerns. Taken together, our analyses suggest that stock liquidity is a determinant of the executive equity compensation awarded to firms’ CEOs, CFOs, and the top management team.

Authors

• Emrah Ekici, University of Wisconsin-Eau Claire

• Marina Y. Ruseva, Lamar University