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Exploring the Role of Stock Liquidity in CEO Equity Compensation Design

Emrah Ekici (University of Wisconsin-Eau Claire, USA)

Marina Y. Ruseva (Lamar University, USA)

ISBN: 978-1-83608-489-1, eISBN: 978-1-83608-488-4

Publication date: 6 September 2024

Abstract

The authors examine the role of stock liquidity in CEO equity compensation design. For a sample of publicly traded firms from 2007 to 2020, the authors find that greater stock liquidity is associated with a higher proportion of stock awards relative to the proportion of options in CEO equity compensation. The results of this study suggest that stock price informativeness on the grant date has a differential effect on the preference for the type of equity compensation awarded to CEOs. The empirical results are supported by multivariate analyses using alternative measures of stock liquidity and a two-stage least squares (2SLS) specification that alleviates endogeneity concerns. Furthermore, the authors document that the firm-specific increase in the proportion of stock awards compared to the proportion of stock options is associated with a firm-specific increase in stock liquidity. Collectively, the analyses suggest that stock liquidity as a measure of stock price informativeness contributes to the choice of CEO equity compensation design.

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Acknowledgements

Acknowledgments

We appreciate helpful comments from Chris Akroyd (Editor) and the two anonymous reviewers. We also thank Christian Kuiate Sobgwi, Sai Harsha Katuri, Ricardo Colon, Ferdinand Siagian (discussant), as well as participants at the 2022 American Accounting Association Southwest Region Meeting and 2022 American Accounting Association Midwest Region Meeting. We also thank Kaye Newberry, Thomas Noland, and Kakoli Bandyopadhyay for their continued support.

Citation

Ekici, E. and Ruseva, M.Y. (2024), "Exploring the Role of Stock Liquidity in CEO Equity Compensation Design", Akroyd, C. (Ed.) Advances in Management Accounting (Advances in Management Accounting, Vol. 36), Emerald Publishing Limited, Leeds, pp. 1-26. https://doi.org/10.1108/S1474-787120240000036001

Publisher

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Emerald Publishing Limited