Hostname: page-component-586b7cd67f-t7czq Total loading time: 0 Render date: 2024-12-02T18:06:13.677Z Has data issue: false hasContentIssue false
  • English
  • Français

Shareholders’ Say on Pay: Does It Create Value?

Published online by Cambridge University Press:  23 December 2010

Jie Cai  and
Ralph A. Walkling
Jie Cai
Affiliation:
LeBow College of Business, Drexel University, 3141 Chestnut St., Philadelphia, PA 19104. [email protected]
Ralph A. Walkling
Affiliation:
LeBow College of Business, Drexel University, 3141 Chestnut St., Philadelphia, PA 19104. [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

Congress and activists recently proposed giving shareholders a say (vote) on executive pay. We find that when the House passed the Say-on-Pay Bill, the market reaction was significantly positive for firms with high abnormal chief executive officer (CEO) compensation, with low pay-for-performance sensitivity, and responsive to shareholder pressure. However, activist-sponsored say-on-pay proposals target large firms, not those with excessive CEO pay, poor governance, or poor performance. The market reacts negatively to labor-sponsored proposal announcements and positively when these proposals are defeated. Our findings suggest that say-on-pay creates value for companies with inefficient compensation but can destroy value for others.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 2 , April 2011 , pp. 299 - 339
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Almazan, A.; Hartzell, J. C.; and Starks, L. T.. “Active Institutional Shareholders and Costs of Monitoring: Evidence from Executive Compensation.” Financial Management, 34 (2005), 5–34.CrossRefGoogle Scholar
Bainbridge, S. M. “Remarks on Say on Pay: An Unjustified Incursion on Director Authority.” University of California at Los Angeles School of Law Research Paper No. 08-06 (2008).CrossRefGoogle Scholar
Baird, J., and Stowasser, P.. “Executive Compensation Disclosure Requirements: The German, U.K. and U.S. Approaches.” Global Counsel (Oct. 2002), 29–42.Google Scholar
Barber, B. M. “Monitoring the Monitor: Evaluating CalPERS’ Activism.” Working Paper, University of California at Davis (2006).CrossRefGoogle Scholar
Bebchuk, L. A. “The Case for Shareholder Access to the Ballot.” Business Lawyer, 59 (2003), 43–66.Google Scholar
Bebchuk, L. A.; Cohen., A.; and Ferrell, A.. “What Matters in Corporate Governance?” Review of Financial Studies, 22 (2009), 783–827.CrossRefGoogle Scholar
Bebchuk, L. A.; Fried, J. M.; and Walker, D. I.. “Managerial Power and Rent Extraction in the Design of Executive Compensation.” University of Chicago Law Review, 69 (2002), 751–846.CrossRefGoogle Scholar
Bebchuk, L. A., and Grinstein, Y.. “The Growth of Executive Pay.” Oxford Review of Economic Policy, 21 (2005), 283–303.CrossRefGoogle Scholar
Berger, P. G.; Li, F.; and Wong, M. H. F.. “The Impact of Sarbanes-Oxley on Cross-Listed Companies.” Working Paper, University of Chicago (2005).Google Scholar
Bizjak, J. M.; Brickley, J. A.; and Coles, J. L.. “Stock-Based Incentive Compensation and Investment Behavior.” Journal of Accounting and Economics, 16 (1993), 349–372.CrossRefGoogle Scholar
Black, B. S. “Shareholder Activism and Corporate Governance in the United States.” The New Palgrave Dictionary of Economics and the Law, 3 (1998), 459–465.Google Scholar
Brook, Y.; Hendershott, R.; and Lee, D.. “The Gains from Takeover Deregulation: Evidence from the End of Interstate Banking Restrictions.” Journal of Finance, 53 (1998), 2185–2203.CrossRefGoogle Scholar
Bryan, S.; Hwang, L.-S.; and Lilien, S.. “CEO Stock-Based Compensation: An Empirical Analysis of Incentive-Intensity, Relative Mix, and Economic Determinants.” Journal of Business, 73 (2000), 661–693.CrossRefGoogle Scholar
Burns, N., and Kedia, S.. “The Impact of Performance-Based Compensation on Misreporting.” Journal of Financial Economics, 79 (2006), 35–67.CrossRefGoogle Scholar
Bushee, B. J., and Leuz, C.. “Economic Consequences of SEC Disclosure Regulation: Evidence from the OTC Bulletin Board.” Journal of Accounting and Economics, 39 (2005), 233–264.CrossRefGoogle Scholar
Cai, J.; Garner, J. L.; and Walkling, R. A.. “Electing Directors.” Journal of Finance, 64 (2009), 2389–2421.CrossRefGoogle Scholar
Cai, J.; Garner, J. L.; and Walkling, R. A.. “Paper Tiger? An Empirical Analysis of Majority Voting.” Working Paper, Drexel University (2010).Google Scholar
Cai, J., and Vijh, A. M.. “Incentive Effects of Stock and Option Holdings of Target and Acquirer CEOs.” Journal of Finance, 62 (2007), 1891–1933.CrossRefGoogle Scholar
Campbell, J. Y.; Lo, A. W.; and MacKinlay, A. C.. “The Econometrics of Financial Markets.” Princeton, NJ: Princeton University Press (1997).Google Scholar
Chhaochharia, V., and Grinstein, Y.. “Corporate Governance and Firm Value: The Impact of the 2002 Governance Rules.” Journal of Finance, 62 (2007), 1789–1825.CrossRefGoogle Scholar
Chhaochharia, V., and Grinstein, Y.. “CEO Compensation and Board Structure.” Journal of Finance, 64 (2009), 231–261.CrossRefGoogle Scholar
Chow, C. W. “The Impacts of Accounting Regulation on Bondholder and Shareholder Wealth: The Case of the Securities Acts.” Accounting Review, 58 (1983), 485–520.Google Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Co-Opted Boards: Costs, Benefits, Causes, and Consequences.” Working Paper, Arizona State University, Drexel University, and Temple University (2007).Google Scholar
Core, J., and Guay, W.. “The Use of Equity Grants to Manage Optimal Equity Incentive Levels.” Journal of Accounting and Economics, 28 (1999), 151–184.CrossRefGoogle Scholar
Core, J. E.; Guay, W. R.; and Verrecchia, R. E.. “Price versus Non-Price Performance Measures in Optimal CEO Compensation Contracts.” Accounting Review, 78 (2003), 957–981.CrossRefGoogle Scholar
Core, J. E.; Holthausen, R. W.; and Larcker, D. F.. “Corporate Governance, Chief Executive Officer Compensation, and Firm Performance.” Journal of Financial Economics, 51 (1999), 371–406.CrossRefGoogle Scholar
Davis, S.“Does ‘Say on Pay’ Work? Lessons on Making CEO Compensation Accountable.” Yale Millstein Center Policy Briefing (2007).Google Scholar
Deane, S. “Say on Pay: Results from Overseas.” Corporate Board (July/Aug. 2007), 11–18.Google Scholar
DeFond, M. L., and Park, C. W.. “The Effect of Competition on CEO Turnover.” Journal of Accounting and Economics, 27 (1999), 35–56.CrossRefGoogle Scholar
Ertimur, Y.; Ferri, F.; and Stubben, S. R.. “Board of Directors’ Responsiveness to Shareholders: Evidence from Shareholder Proposals.” Working Paper, Duke University, Harvard University, and University of North Carolina at Chapel Hill (2007).Google Scholar
Fama, E. F. “Agency Problems and the Theory of the Firm.” Journal of Political Economy, 88 (1980), 288–307.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Industry Costs of Equity.” Journal of Financial Economics, 43 (1997), 153–193.CrossRefGoogle Scholar
Ferri, F., and Maber, D.. “Solving the Executive Compensation Problem through Shareholder Votes? Evidence from the U.K.” Working Paper, Harvard Business School and University of Southern California (2009).Google Scholar
Fich, E. M., and Shivdasani, A.. “Are Busy Boards Effective Monitors?” Journal of Finance, 61 (2006), 689–724.CrossRefGoogle Scholar
Gaver, J. J., and Gaver, K. M.. “Additional Evidence on the Association between the Investment Opportunity Set and Corporate Financing, Dividend, and Compensation Policies.” Journal of Accounting and Economics, 16 (1993), 125–160.CrossRefGoogle Scholar
Gillan, S. L., and Starks, L. T.. “Corporate Governance Proposals and Shareholder Activism: The Role of Institutional Investors.” Journal of Financial Economics, 57 (2000), 275–305.CrossRefGoogle Scholar
Gillan, S. L., and Starks, L. T.. “The Evolution of Shareholder Activism in the United States.” Journal of Applied Corporate Finance, 19 (2007), 55–73.CrossRefGoogle Scholar
Gompers, P.; Ishii, J.; and Metrick, A.. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118 (2003), 107–155.CrossRefGoogle Scholar
Greenstone, M.; Oyer, P.; and Vissing-Jorgensen, A.. “Mandated Disclosure, Stock Returns, and the 1964 Securities Acts Amendments.” Quarterly Journal of Economics, 121 (2006), 399–460.CrossRefGoogle Scholar
Grundfest, J. A. “Just Vote No: A Minimalist Strategy for Dealing with Barbarians Inside the Gates.” Stanford Law Review, 45 (1993), 857–937.CrossRefGoogle Scholar
Hall, B. J., and Murphy, K. J.. “The Trouble with Stock Options.” Journal of Economic Perspectives, 17 (2003), 49–70.CrossRefGoogle Scholar
Harris, M. S. “The Association between Competition and Managers’ Business Segment Reporting Decisions.” Journal of Accounting Research, 36 (1998), 111–128.CrossRefGoogle Scholar
Hartzell, J. C., and Starks, L. T.. “Institutional Investors and Executive Compensation.” Journal of Finance, 58 (2003), 2351–2374.CrossRefGoogle Scholar
Hsieh, J., and Walkling, R. A.. “Determinants and Implications of Arbitrage Holdings in Acquisitions.” Journal of Financial Economics, 77 (2005), 605–648.CrossRefGoogle Scholar
Jensen, M. C., and Meckling, W. H.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 4 (1976), 305–360.CrossRefGoogle Scholar
Jensen, M. C., and Murphy, K. J.. “Performance Pay and Top-Management Incentives.” Journal of Political Economy, 98 (1990), 225–264.CrossRefGoogle Scholar
Johnson, M. F.; Kasznik, R.; and Nelson, K. K.. “Shareholder Wealth Effects of the Private Securities Litigation Reform Act of 1995.” Review of Accounting Studies, 5 (2000), 217–233.CrossRefGoogle Scholar
Johnson, M. F., and Shackell, M. B.. “Shareholder Proposals on Executive Compensation.” Working Paper, University of Michigan (1997).CrossRefGoogle Scholar
Karpoff, J.“The Impact of Shareholder Activism on Target Companies: A Survey of Empirical Findings.” Working Paper, University of Washington (2001).CrossRefGoogle Scholar
Karpoff, J. M., and Malatesta, P. H.. “The Wealth Effects of Second-Generation State Takeover Legislation.” Journal of Financial Economics, 25 (1989), 291–322.CrossRefGoogle Scholar
Karpoff, J. M., and Malatesta, P. H.. “State Takeover Legislation and Share Values: The Wealth Effects of Pennsylvania’s Act 36.” Journal of Corporate Finance, 1 (1995), 367–382.CrossRefGoogle Scholar
Karpoff, J. M.; Malatesta, P. H.; and Walkling, R. A.. “Corporate Governance and Shareholder Initiatives: Empirical Evidence.” Journal of Financial Economics, 42 (1996), 365–395.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; and Shleifer, A.. “What Works in Securities Laws?” Journal of Finance, 61 (2006), 1–32.CrossRefGoogle Scholar
Li, H.; Pincus, M.; and Rego, S. O.. “Market Reaction to Events Surrounding the Sarbanes-Oxley Act of 2002 and Earnings Management.” Journal of Law and Economics, 51 (2008), 111–134.CrossRefGoogle Scholar
Litvak, K. “The Effect of the Sarbanes-Oxley Act on Non-U.S. Companies Cross-Listed in the U.S.” Journal of Corporate Finance, 13 (2007), 195–228.CrossRefGoogle Scholar
Lo, K. “Economic Consequences of Regulated Changes in Disclosure: The Case of Executive Compensation.” Journal of Accounting and Economics, 35 (2003), 285–314.CrossRefGoogle Scholar
Mehran, H. “Executive Compensation Structure, Ownership, and Firm Performance.” Journal of Financial Economics, 38 (1995), 163–184.CrossRefGoogle Scholar
Schipper, K., and Thompson, R.. “The Impact of Merger-Related Regulations on the Shareholders of Acquiring Firms.” Journal of Accounting Research, 21 (1983), 184–221.CrossRefGoogle Scholar
Schwert, G. W. “Using Financial Data to Measure Effects of Regulation.” Journal of Law and Economics, 24 (1981), 121–158.CrossRefGoogle Scholar
Sefcik, S., and Thompson, R.. “An Approach to Statistical Inference in Cross-Sectional Models with Security Abnormal Returns as Dependent Variable.” Journal of Accounting Research, 2 (1986), 316–334.CrossRefGoogle Scholar
Shivdasani, A., and Yermack, D.. “CEO Involvement in the Selection of New Board Members: An Empirical Analysis.” Journal of Finance, 59 (1999), 1829–1853.CrossRefGoogle Scholar
Smith, C. W., and Watts, R. L.. “The Investment Opportunity Set and Corporate Financing, Dividend, and Compensation Policies.” Journal of Financial Economics, 32 (1992), 263–292.CrossRefGoogle Scholar
Thomas, R. S., and Cotter, J. F.. “Shareholder Proposals in the New Millennium: Shareholder Support, Board Response, and Market Reaction.” Journal of Corporate Finance, 13 (2007), 368–391.CrossRefGoogle Scholar
Thomas, R. S., and Martin, K. J.. “The Effect of Shareholder Proposals on Executive Compensation.” University of Cincinnati Law Review, 67 (1999), 1021–1081.Google Scholar
Yermack, D. “Do Corporations Award CEO Stock Options Effectively?” Journal of Financial Economics, 39 (1995), 237–269.CrossRefGoogle Scholar
Yermack, D. “Higher Market Valuation of Companies with a Small Board of Directors.” Journal of Financial Economics, 40 (1996), 185–211.CrossRefGoogle Scholar
Yermack, D. “Flights of Fancy: Corporate Jets, CEO Perquisites, and Inferior Shareholder Returns.” Journal of Financial Economics, 80 (2006), 211–242.CrossRefGoogle Scholar
Zhang, I. X. “Economic Consequences of the Sarbanes-Oxley Act of 2002.” Journal of Accounting and Economics, 44 (2007), 74–115.CrossRefGoogle Scholar