Information-based stock trading and managerial incentives : evidence from China's stock market

Michael FIRTH, Man JIN, Yuanyuan ZHANG

Research output: Journal PublicationsJournal Article (refereed)peer-review

3 Citations (Scopus)


This paper uses stock price informativeness, or information-based stock trading, to help explain the pay–performance sensitivity (PPS) of chief executive officer (CEO) compensation in China's listed firms. We argue that higher stock price informativeness, which we measure by the probability of informed trading, helps and encourages shareholders to incentivize the top management team based on stock market performance. The regression results support our argument and show that a higher level of stock price informativeness is associated with higher CEO PPSs. Moreover, the impact of stock price informativeness on CEO incentives is stronger for privately controlled listed firms than it is for state-controlled listed firms. The results also hold when information asymmetry is approximated by the accuracy and dispersion of the earnings forecasts made by financial analysts.
Original languageEnglish
Pages (from-to)637-656
Number of pages20
JournalThe European Journal of Finance
Issue number7-9
Early online date8 Aug 2012
Publication statusPublished - 2014

Bibliographical note

The authors gratefully acknowledge the helpful comments and suggestions of Edward Lee (our discussant), two anonymous reviewers, and participants at the Durham University and European Journal of Finance joint conference on the Chinese Capital Market. The authors also thank Jin Gao, Ping Lin, Aristotelis Stouraitis, Sonia Wong, and seminar participants at Lingnan University and the Hong Kong Institute of Business Studies for helpful comments on earlier versions of the paper. Simon Lo and Lili Wang provided excellent research assistance. Zhang gratefully acknowledges the financial support from the Research Committee of Lingnan University (Grant No. DB10A2).


  • compensation
  • probability of informed trading

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