Dark Trading and Stock-based CEO Pay

Abstract

Does trading away from public exchanges affect the way top executives are paid? Yes, our study finds that companies with a higher proportion of shares traded in “dark” (i.e., off-exchange) venues tend to offer more stock-based compensation to their CEOs. This relationship is primarily driven by enhanced price informativeness in lit (i.e., on-exchange/public) markets resulting from dark trading activities, making stock-based compensation a more attractive and effective tool for aligning executive incentives with shareholder returns. Consistent with this explanation, we show that the effect is most pronounced in firms where the impact of dark trading is likely greatest on price informativeness (firms with opaque information environments) and where compensation committees are more likely to extract information from stock prices (committees possessing greater financial expertise, higher equity ownership, and fewer external commitments). To address endogeneity concerns, we employ a treatment effects model and a difference-in-differences framework using the SEC's Tick Size Pilot Program as an exogenous shock to dark trading.