Passive Demand but Active Pay: The Effect of ETF Flows on CEO Stock Option Compensation

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" Passive Demand but Active Pay: The Effect of ETF Flows on CEO Stock Option Compensation "
Azim, Muhammad Bova, Francesco

Document Type	:	Latin Dissertation
Language of Document	:	English
Record Number	:	1055569
Doc. No	:	TL54686
Main Entry	:	Azim, Muhammad
Title & Author	:	Passive Demand but Active Pay: The Effect of ETF Flows on CEO Stock Option Compensation\ Azim, MuhammadBova, Francesco
College	:	University of Toronto (Canada)
Date	:	2020
Degree	:	Ph.D.
student score	:	2020
Note	:	106 p.
Abstract	:	The rising prominence of exchange-traded funds (ETFs) over the past decade has resulted in a non-fundamentals driven demand for stocks held in ETF baskets. Prior research on ETFs finds both ETF-related stock price mis-valuation and ETF-related increases in the co-movement of stock prices. Separately, prior research on CEO compensation suggests that firms should use less stock option compensation when stock prices are less informative about firm performance as it becomes more difficult to mitigate the moral hazard problem, but more stock option compensation when there is increased co-movement, as stock options become a more effective tool for retention. Motivated by the fact that stock prices play a key role in CEO compensation decisions, this study tests the effect of ETF flows on CEO stock option compensation. I find that stock option compensation is increasing with ETF flows. Further, I find that the positive relation between stock option compensation and ETF flows is prominent in cross-sections where there is an ex ante motivation to compensate executives with options for retention purposes. Additionally, I do not find a positive relationship between risk-taking or firm performance with ETF flows, but do find a decrease in CEO turnover with increased ETF flows. The combined results suggest that: 1.) ETF flows may have affected firm incentives to compensate managers with stock options for retention purposes, and 2.) incentive alignment does not appear to be a prominent factor in awarding CEO stock options.
Descriptor	:	Accounting
	:	Finance
	:	Management
Added Entry	:	Bova, Francesco
Added Entry	:	University of Toronto (Canada)