Market structure is usually treated as a trading desk issue: where do orders go, what are the spreads, and what influence do investors have in the marketplace? However, recent research shows that market structure can even influence boardroom decisions.
In a current one Study, We find that firms with more over-the-counter or “dark” trading are more reliant on equity-based CEO compensation. The reason shouldn’t be that granting equity becomes cheaper. This is because dark trading could make stock prices more meaningful and provides boards a greater benchmark for evaluating management performance
Analyzing 12,667 company-years of publicly traded U.S. firms from 2007 to 2021, we discover that firms with more dark trading invest about 10.6 percentage points more of CEO compensation in stocks—a 21% increase in comparison with the sample average. During the identical period, the share of over-the-counter trading volume increased from 23% to twenty-eight%.
The results show a direct connection between where trading occurs and the best way firms incentivize their executives. Market structure not only influences transaction costs; It influences the standard of the worth signals that boards depend on to shape compensation. For investment professionals, this has implications for interpreting salary data, assessing governance quality and assessing the potential impact of market structure regulation.
