CEO incentive compensation and stock price momentum |
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| Authors: | Jian Wang Yanhuang Huang Hongrui Feng Xingjian Li Shu Yan |
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| Institution: | 1. Department of Finance, School of Business Administration, Northeastern University, Shenyang, China;2. Department of Finance, Black School of Business, Penn State Behrend, Erie, Pennsylvania, USA;3. Department of Finance, School of Economics, Zhejiang University, Hangzhou, China;4. Department of Finance, Spears School of Business, Oklahoma State University, Stillwater, Oklahoma, USA |
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| Abstract: | We document strong evidence that CEO incentive compensation can predict the significance of stock price momentum through discretionary accrual and real activities manipulation. The profit of momentum strategy increases with CEO pay-for-performance incentive, but decreases with CEO risk-taking incentive. It also evaluates the effects of information uncertainty on such relationship. The evidence is more significant for firms with older and longer tenured CEOs and firms with more informed traders. The relationship between the profit of momentum strategy and CEO pay-for-performance incentive is stronger among CEOs without the risk-taking incentive. Our results are robust for different sub-samples based on before and after Reg FD and Sarbanes–Oxley Act, even after controlling for the potential endogeneity. Further, our findings are consistent with the information diffusion explanation of momentum and the agency theory that incentivised CEOs tend to manipulate information by smoothing good news, concealing mildly bad news and accelerating the disclosure of extremely bad news. |
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| Keywords: | CEO incentive compensation CEO traits information manipulation information uncertainty momentum |
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