The Market Reaction to Changes in Compensation Contracts: A Review of the Evidence

Abstract

Empirical evidence on the shareholder wealth effects of changes in executive compensation agreements is provided by a body of research which examines common stock returns around the time that pay packages are modified. Most studies report significantly positive excess stock returns contemporaneous with the compensation event. Despite this, numerous methodological issues prevent researchers from ascribing a causal relation between the compensation change and the observed stock price behavior. This paper critically reviews the accumulated evidence from studies in this literature and suggests directions for future research.

Citation

Gaver, J.J. and Gaver, K.M. (1997), "The Market Reaction to Changes in Compensation Contracts: A Review of the Evidence", Managerial Finance, Vol. 23 No. 5, pp. 3-17. https://doi.org/10.1108/eb018622