Product Market Competition and Managerial Pay

ABSTRACT In this study I find that product substitutability has a negative relation with pay-earnings but no relation with pay-stock return sensitivity, whereas market size and ease of entry have no relation with pay-earnings but a positive relation with pay-stock return sensitivity. These findings collectively imply that firms in more competitive industries place less reliance on earnings-based and greater reliance on stock-based measures to determine managerial compensation than firms in less competitive industries. I also find that product substitutability has a positive relation whereas market size and ease of entry have negative relations with managerial pay levels, suggesting different dimensions of product market competition may have independent influences on managerial pay design. Finally, I find that industry regulation has a positive relation with pay-earnings but a negative relation with pay-stock return sensitivity. This study's findings suggest a contextual approach to examining the relation between industry attributes and managerial pay. JEL Classifications: D4; G34; J33; L1; M40; M41; M46. Data Availability: Data are available from the public sources cited in the text.

Relative Firm Profitability and Stock Return Sensitivity to Industry-Level News

ABSTRACT This study provides theory and evidence to demonstrate how relative firm profitability within an industry affects stock return sensitivity to industry-level news. Extending the Cournot and Bertrand competition models, we predict that (1) the returns of less profitable firms in an industry are more sensitive to industry-level news than those of more profitable firms, and that (2) this inverse relation between relative profitability and return sensitivity is more pronounced when there is positive rather than negative industry news, especially in industries with high (versus low) capital intensity. Using industry returns to proxy for industry-level news, we obtain empirical results consistent with these predictions. We further find that the two fundamental factors that contribute to profitability—cost efficiency and market share—each exhibit an effect similar to that of relative profitability in affecting return sensitivity. Our results remain unchanged after controlling for stock price movements attributable to common risk factors and firm-specific accounting information, and they hold over a range of robustness tests.