Extracting Information from Compensation Actually Paid: Stock Price Effects versus Other Signals | CU Experts

ABSTRACT; “Compensation actually paid” (CAP) in the SEC’s “Pay versus Performance” disclosure represents a rare but significant update to required compensation disclosure. We provide a method for estimating the predictable portion of CAP using publicly available information based on the executives’ equity portfolio and stock price changes during the year. Our estimate explains 75 percent of the variation in actual CAP. We then consider whether the unexplained portion contains new information not previously available to investors, such as changes in firms’ expectations about future performance share payouts. We find some evidence that this unexplained portion is associated with future operating and stock performance in firms where CAP is more likely to be informative (e.g., cases where the executive has a performance-vested equity portfolio). Our methodology can be used by investors and researchers to identify CAP disclosures that may warrant further investigation.; Data Availability: All data are available from public sources.; JEL Classifications: J33; M12; M52.

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