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Article: Information-based stock trading, executive incentives, and the principal-agent problem

TitleInformation-based stock trading, executive incentives, and the principal-agent problem
Authors
Kang, QLiu, Q
KeywordsAdjusted pin
Calibration
Endogenous information-based trading
Pay-performance sensitivity
Risk-incentive trade-off
Issue Date2010
PublisherINFORMS. The Journal's web site is located at http://mansci.pubs.informs.org
Citation
Management Science, 2010, v. 56 n. 4, p. 682-698 How to Cite?
DOI: http://dx.doi.org/10.1287/mnsc.1090.1128
AbstractWe examine the role of information-based stock trading in affecting the risk-incentive relation. By incorporating an endogenous informed trading into an optimal incentive contracting model, we analytically show that, apart from reducing incentives, a greater risk increases the level of information-based trading, which consequently enhances executive incentives and offsets the negative risk-incentive relation. We calibrate the model and find that the economic magnitude of this incentive-enhancement effect is significant. Our empirical test using real-world executive compensation data lends strong support to the model prediction. Our results suggest that principals (boards of directors) should consider underlying stock trading characteristics when structuring executive incentives. © 2010 INFORMS.
Persistent Identifierhttp://hdl.handle.net/10722/129434
ISSN
0025-1909
2023 Impact Factor: 4.6
2023 SCImago Journal Rankings: 5.438
ISI Accession Number ID
WOS:000276500300006
Funding AgencyGrant Number
University of Miami
University Grants Committee of the Hong Kong Special Administrative Region, ChinaHKU 7472/06H
HKU 747107H
Funding Information:

The authors thank David Hsieh (the department editor), one associate editor, two anonymous referees, Chong-En Bai, Hongbin Cai, Sudipto Dasgupta, Hassan Naqvi, Wing Suen, Xianming Zhou, and seminar participants at Beijing University, University of Hong Kong, and Asian Finance Association Annual Meeting for helpful comments and suggestions. They also thank Jefferson Duarte for sharing his PIN data, developed in Duarte and Young (2009). An earlier draft was completed while Qiang Kang was affiliated with the University of Hong Kong, whose hospitality is gratefully acknowledged. The authors appreciate financial support from the University of Miami McLamore Award (Qiang Kang) and the University Grants Committee of the Hong Kong Special Administrative Region, China (Projects HKU 7472/06H and HKU 747107H, Qiao Liu). All errors remain the authors' responsibility.

References
References in Scopus
Grants
The impact of bond ratings changes on CEO incentives
Institutions, Financial Development, and Corporate Investment: Evidence during Chinas Reform Era'

 

DC FieldValueLanguage
dc.contributor.authorKang, Qen_HK
dc.contributor.authorLiu, Qen_HK
dc.date.accessioned2010-12-23T08:37:13Z-
dc.date.available2010-12-23T08:37:13Z-
dc.date.issued2010en_HK
dc.identifier.citationManagement Science, 2010, v. 56 n. 4, p. 682-698en_HK
dc.identifier.issn0025-1909en_HK
dc.identifier.urihttp://hdl.handle.net/10722/129434-
dc.description.abstractWe examine the role of information-based stock trading in affecting the risk-incentive relation. By incorporating an endogenous informed trading into an optimal incentive contracting model, we analytically show that, apart from reducing incentives, a greater risk increases the level of information-based trading, which consequently enhances executive incentives and offsets the negative risk-incentive relation. We calibrate the model and find that the economic magnitude of this incentive-enhancement effect is significant. Our empirical test using real-world executive compensation data lends strong support to the model prediction. Our results suggest that principals (boards of directors) should consider underlying stock trading characteristics when structuring executive incentives. © 2010 INFORMS.en_HK
dc.languageengen_US
dc.publisherINFORMS. The Journal's web site is located at http://mansci.pubs.informs.orgen_HK
dc.relation.ispartofManagement Scienceen_HK
dc.subjectAdjusted pinen_HK
dc.subjectCalibrationen_HK
dc.subjectEndogenous information-based tradingen_HK
dc.subjectPay-performance sensitivityen_HK
dc.subjectRisk-incentive trade-offen_HK
dc.titleInformation-based stock trading, executive incentives, and the principal-agent problemen_HK
dc.typeArticleen_HK
dc.identifier.openurlhttp://library.hku.hk:4550/resserv?sid=HKU:IR&issn=0025-1909&volume=56 &issue=4&spage=682&epage=698&date=2010&atitle=Information-based+stock+trading,+executive+incentives,+and+the+principal-agent+problem-
dc.identifier.emailLiu, Q: qliu@hku.hken_HK
dc.identifier.authorityLiu, Q=rp01078en_HK
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.1287/mnsc.1090.1128en_HK
dc.identifier.scopuseid_2-s2.0-77950846661en_HK
dc.identifier.hkuros177109en_US
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-77950846661&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume56en_HK
dc.identifier.issue4en_HK
dc.identifier.spage682en_HK
dc.identifier.epage698en_HK
dc.identifier.isiWOS:000276500300006-
dc.publisher.placeUnited Statesen_HK
dc.relation.projectThe impact of bond ratings changes on CEO incentives-
dc.relation.projectInstitutions, Financial Development, and Corporate Investment: Evidence during Chinas Reform Era'-
dc.identifier.scopusauthoridKang, Q=24484765900en_HK
dc.identifier.scopusauthoridLiu, Q=55429572300en_HK
dc.identifier.issnl0025-1909-

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