IDEAS home Printed from https://ideas.repec.org/a/eee/finmar/v35y2017icp65-83.html
   My bibliography  Save this article

Teaming up and quiet intervention: The impact of institutional investors on executive compensation policies

Author

Listed:
  • Mazur, Mieszko
  • Salganik-Shoshan, Galla

Abstract

In this paper, we investigate whether institutional investors intervene in firms in order to impact their incentive systems. We use metrics based on geographic distance between institutional investors as proxies for the intensity of their strategic interactions and plausible interventions. We find that when investors are geographically proximate to one another, firms tend to adopt executive compensation contracts that exhibit more performance-based mechanisms, higher incentives to expend managerial effort, and higher incentives to make risky and positive NPV policy choices. We also find that geographic distance between institutions is a significant determinant of the executive pay differentials.

Suggested Citation

  • Mazur, Mieszko & Salganik-Shoshan, Galla, 2017. "Teaming up and quiet intervention: The impact of institutional investors on executive compensation policies," Journal of Financial Markets, Elsevier, vol. 35(C), pages 65-83.
    • Handle: RePEc:eee:finmar:v:35:y:2017:i:c:p:65-83
    DOI: 10.1016/j.finmar.2016.12.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1386418116300301
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.finmar.2016.12.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
    2. Vidhi Chhaochharia & Yaniv Grinstein, 2009. "CEO Compensation and Board Structure," Journal of Finance, American Finance Association, vol. 64(1), pages 231-261, February.
    3. Zoran Ivkovi & Scott Weisbenner, 2007. "Information Diffusion Effects in Individual Investors' Common Stock Purchases: Covet Thy Neighbors' Investment Choices," The Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1327-1357.
    4. Grinstein, Yaniv & Hribar, Paul, 2004. "CEO compensation and incentives: Evidence from M&A bonuses," Journal of Financial Economics, Elsevier, vol. 73(1), pages 119-143, July.
    5. Augustin Landier & Vinay B. Nair & Julie Wulf, 2009. "Trade-offs in Staying Close: Corporate Decision Making and Geographic Dispersion," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1119-1148.
    6. Anzhela Knyazeva & Diana Knyazeva & Ronald W. Masulis, 2013. "The Supply of Corporate Directors and Board Independence," The Review of Financial Studies, Society for Financial Studies, vol. 26(6), pages 1561-1605.
    7. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-1395, November.
    8. Hoechle, Daniel & Schmid, Markus & Walter, Ingo & Yermack, David, 2012. "How much of the diversification discount can be explained by poor corporate governance?," Journal of Financial Economics, Elsevier, vol. 103(1), pages 41-60.
    9. Bognanno, Michael L, 2001. "Corporate Tournaments," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 290-315, April.
    10. Liu, Yixin & Mauer, David C., 2011. "Corporate cash holdings and CEO compensation incentives," Journal of Financial Economics, Elsevier, vol. 102(1), pages 183-198, October.
    11. JOSEPH A. McCAHERY & ZACHARIAS SAUTNER & LAURA T. STARKS, 2016. "Behind the Scenes: The Corporate Governance Preferences of Institutional Investors," Journal of Finance, American Finance Association, vol. 71(6), pages 2905-2932, December.
    12. Jayant R. Kale & Ebru Reis & Anand Venkateswaran, 2009. "Rank‐Order Tournaments and Incentive Alignment: The Effect on Firm Performance," Journal of Finance, American Finance Association, vol. 64(3), pages 1479-1512, June.
    13. Thomas H. Noe, 2002. "Investor Activism and Financial Market Structure," The Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 289-318, March.
    14. Armstrong, Christopher S. & Vashishtha, Rahul, 2012. "Executive stock options, differential risk-taking incentives, and firm value," Journal of Financial Economics, Elsevier, vol. 104(1), pages 70-88.
    15. Bae, Kee-Hong & Stulz, René M. & Tan, Hongping, 2008. "Do local analysts know more? A cross-country study of the performance of local analysts and foreign analysts," Journal of Financial Economics, Elsevier, vol. 88(3), pages 581-606, June.
    16. Low, Angie, 2009. "Managerial risk-taking behavior and equity-based compensation," Journal of Financial Economics, Elsevier, vol. 92(3), pages 470-490, June.
    17. Uysal, Vahap B. & Kedia, Simi & Panchapagesan, Venkatesh, 2008. "Geography and acquirer returns," Journal of Financial Intermediation, Elsevier, vol. 17(2), pages 256-275, April.
    18. David Roodman, 2009. "A Note on the Theme of Too Many Instruments," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(1), pages 135-158, February.
    19. Core, John E. & Guay, Wayne & Larcker, David F., 2008. "The power of the pen and executive compensation," Journal of Financial Economics, Elsevier, vol. 88(1), pages 1-25, April.
    20. Bizjak, John M. & Lemmon, Michael L. & Naveen, Lalitha, 2008. "Does the use of peer groups contribute to higher pay and less efficient compensation?," Journal of Financial Economics, Elsevier, vol. 90(2), pages 152-168, November.
    21. Custódio, Cláudia & Ferreira, Miguel A. & Matos, Pedro, 2013. "Generalists versus specialists: Lifetime work experience and chief executive officer pay," Journal of Financial Economics, Elsevier, vol. 108(2), pages 471-492.
    22. Baik, Bok & Kang, Jun-Koo & Kim, Jin-Mo, 2010. "Local institutional investors, information asymmetries, and equity returns," Journal of Financial Economics, Elsevier, vol. 97(1), pages 81-106, July.
    23. Alex Edmans & Gustavo Manso, 2011. "Governance Through Trading and Intervention: A Theory of Multiple Blockholders," The Review of Financial Studies, Society for Financial Studies, vol. 24(7), pages 2395-2428.
    24. Bliss, Richard T. & Rosen, Richard J., 2001. "CEO compensation and bank mergers," Journal of Financial Economics, Elsevier, vol. 61(1), pages 107-138, July.
    25. O'Connor, Matthew L. & Rafferty, Matthew, 2010. "Incentive effects of executive compensation and the valuation of firm assets," Journal of Corporate Finance, Elsevier, vol. 16(4), pages 431-442, September.
    26. Nielsson, Ulf & Wójcik, Dariusz, 2016. "Proximity and IPO underpricing," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 92-105.
    27. repec:bla:jfinan:v:53:y:1998:i:4:p:1335-1362 is not listed on IDEAS
    28. Cornett, Marcia Millon & Marcus, Alan J. & Tehranian, Hassan, 2008. "Corporate governance and pay-for-performance: The impact of earnings management," Journal of Financial Economics, Elsevier, vol. 87(2), pages 357-373, February.
    29. Henrik Cronqvist & Rüdiger Fahlenbrach, 2009. "Large Shareholders and Corporate Policies," The Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 3941-3976, October.
    30. Kang, Qiang & Liu, Qiao & Qi, Rong, 2010. "The Sarbanes-Oxley act and corporate investment: A structural assessment," Journal of Financial Economics, Elsevier, vol. 96(2), pages 291-305, May.
    31. Jay C. Hartzell & Laura T. Starks, 2003. "Institutional Investors and Executive Compensation," Journal of Finance, American Finance Association, vol. 58(6), pages 2351-2374, December.
    32. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    33. Brenner, Menachem & Sundaram, Rangarajan K. & Yermack, David, 2000. "Altering the terms of executive stock options," Journal of Financial Economics, Elsevier, vol. 57(1), pages 103-128, July.
    34. Tchistyi, Alexei & Yermack, David & Yun, Hayong, 2011. "Negative Hedging: Performance-Sensitive Debt and CEOs’ Equity Incentives," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(3), pages 657-686, June.
    35. Yakov Amihud & Baruch Lev, 1981. "Risk Reduction as a Managerial Motive for Conglomerate Mergers," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 605-617, Autumn.
    36. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-488, June.
    37. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    38. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    39. Bebchuk, Lucian A. & Cremers, K.J. Martijn & Peyer, Urs C., 2011. "The CEO pay slice," Journal of Financial Economics, Elsevier, vol. 102(1), pages 199-221, October.
    40. Gaspar, Jose-Miguel & Massa, Massimo, 2007. "Local ownership as private information: Evidence on the monitoring-liquidity trade-off," Journal of Financial Economics, Elsevier, vol. 83(3), pages 751-792, March.
    41. Veronika K. Pool & Noah Stoffman & Scott E. Yonker, 2015. "The People in Your Neighborhood: Social Interactions and Mutual Fund Portfolios," Journal of Finance, American Finance Association, vol. 70(6), pages 2679-2732, December.
    42. John, Kose & Knyazeva, Anzhela & Knyazeva, Diana, 2011. "Does geography matter? Firm location and corporate payout policy," Journal of Financial Economics, Elsevier, vol. 101(3), pages 533-551, September.
    43. Core, John E. & Holthausen, Robert W. & Larcker, David F., 1999. "Corporate governance, chief executive officer compensation, and firm performance," Journal of Financial Economics, Elsevier, vol. 51(3), pages 371-406, March.
    44. Harrison Hong & Jeffrey D. Kubik & Jeremy C. Stein, 2005. "Thy Neighbor's Portfolio: Word‐of‐Mouth Effects in the Holdings and Trades of Money Managers," Journal of Finance, American Finance Association, vol. 60(6), pages 2801-2824, December.
    45. Hollander, Stephan & Verriest, Arnt, 2016. "Bridging the gap: the design of bank loan contracts and distance," Journal of Financial Economics, Elsevier, vol. 119(2), pages 399-419.
    46. Haugen, Robert A & Senbet, Lemma W, 1981. "Resolving the Agency Problems of External Capital through Options," Journal of Finance, American Finance Association, vol. 36(3), pages 629-647, June.
    47. John Core & Wayne Guay, 2002. "Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 613-630, June.
    48. Wintoki, M. Babajide & Linck, James S. & Netter, Jeffry M., 2012. "Endogeneity and the dynamics of internal corporate governance," Journal of Financial Economics, Elsevier, vol. 105(3), pages 581-606.
    49. Coles, Jeffrey L. & Lemmon, Michael L. & Felix Meschke, J., 2012. "Structural models and endogeneity in corporate finance: The link between managerial ownership and corporate performance," Journal of Financial Economics, Elsevier, vol. 103(1), pages 149-168.
    50. Joshua D. Coval & Tobias J. Moskowitz, 1999. "Home Bias at Home: Local Equity Preference in Domestic Portfolios," Journal of Finance, American Finance Association, vol. 54(6), pages 2045-2073, December.
    51. Joshua D. Coval & Tobias J. Moskowitz, 2001. "The Geography of Investment: Informed Trading and Asset Prices," Journal of Political Economy, University of Chicago Press, vol. 109(4), pages 811-841, August.
    52. Boubakri, Narjess & Guedhami, Omrane & Saffar, Walid, 2016. "Geographic location, foreign ownership, and cost of equity capital: Evidence from privatization," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 363-381.
    53. Coles, Jeffrey L. & Daniel, Naveen D. & Naveen, Lalitha, 2006. "Managerial incentives and risk-taking," Journal of Financial Economics, Elsevier, vol. 79(2), pages 431-468, February.
    54. Chen, Xia & Harford, Jarrad & Li, Kai, 2007. "Monitoring: Which institutions matter?," Journal of Financial Economics, Elsevier, vol. 86(2), pages 279-305, November.
    55. Kedia, Simi & Rajgopal, Shiva, 2009. "Neighborhood matters: The impact of location on broad based stock option plans," Journal of Financial Economics, Elsevier, vol. 92(1), pages 109-127, April.
    56. García, Diego & Norli, Øyvind, 2012. "Geographic dispersion and stock returns," Journal of Financial Economics, Elsevier, vol. 106(3), pages 547-565.
    57. Alam, Zinat S. & Chen, Mark A. & Ciccotello, Conrad S. & Ryan, Harley E., 2014. "Does the Location of Directors Matter? Information Acquisition and Board Decisions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 49(1), pages 131-164, February.
    58. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 42-64, Spring.
    59. Mark S. Seasholes & Ning Zhu, 2010. "Individual Investors and Local Bias," Journal of Finance, American Finance Association, vol. 65(5), pages 1987-2010, October.
    60. Smith, Clifford W. & Stulz, René M., 1985. "The Determinants of Firms' Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(4), pages 391-405, December.
    61. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sanggyu Kang & Chune Young Chung & Amirhossein Fard, 2024. "Does geographic or market proximity matter? Evidence from institutional investor monitoring on earnings attributes in US cross‐listed stocks," Bulletin of Economic Research, Wiley Blackwell, vol. 76(2), pages 443-469, April.
    2. Mazur, Mieszko & Salganik-Shoshan, Galla & Walker, Thomas & Wang, Jun, 2018. "Proximity and litigation: Evidence from the geographic location of institutional investors," Journal of Financial Markets, Elsevier, vol. 40(C), pages 60-74.
    3. Manika Kohli, 2018. "Impact of Ownership Type and Board Characteristics on the Pay–Performance Relationship: Evidence from India," Indian Journal of Corporate Governance, , vol. 11(1), pages 1-34, June.
    4. Jiangyuan Wang & Guangqiang Liu & Qisong Xiong, 2020. "Institutional investors’ information seeking and stock price crash risk: nonlinear relationship based on management’s opportunistic behaviour," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(5), pages 4621-4649, December.
    5. Suveera Gill & Manika Kohli, 2018. "Perceptual Determinants of Executive Compensation: Survey-Based Evidence from India," Indian Journal of Corporate Governance, , vol. 11(2), pages 159-184, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Benson, Bradley W. & Chen, Yu & James, Hui L. & Park, Jung Chul, 2020. "So far away from me: Firm location and the managerial ownership effect on firm value," Journal of Corporate Finance, Elsevier, vol. 64(C).
    2. Wang, Qin (Emma) & Zhang, Jun, 2023. "Local institutional investors and debt maturity," Journal of Financial Markets, Elsevier, vol. 62(C).
    3. Mazur, Mieszko & Salganik-Shoshan, Galla, 2019. "The effect of executive stock option delta and vega on the spin-off decision," The Quarterly Review of Economics and Finance, Elsevier, vol. 72(C), pages 132-144.
    4. Mazur, Mieszko & Salganik-Shoshan, Galla & Walker, Thomas & Wang, Jun, 2018. "Proximity and litigation: Evidence from the geographic location of institutional investors," Journal of Financial Markets, Elsevier, vol. 40(C), pages 60-74.
    5. Chen, Yunsen & Huang, Jianqiao & Xiao, Sheng & Zhao, Ziye, 2020. "The “home bias” of corporate subsidiary locations," Journal of Corporate Finance, Elsevier, vol. 62(C).
    6. Huang, Xiaoran & Kang, Jun-Koo, 2017. "Geographic concentration of institutions, corporate governance, and firm value," Journal of Corporate Finance, Elsevier, vol. 47(C), pages 191-218.
    7. Becker, Bo & Cronqvist, Henrik & Fahlenbrach, Rüdiger, 2011. "Estimating the Effects of Large Shareholders Using a Geographic Instrument," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(4), pages 907-942, August.
    8. Jing Zhang & Jieun Chung, 2018. "Does geographical location matter for managerial compensation design?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(1), pages 1-32, January.
    9. Carosi, Andrea, 2016. "Do local causations matter? The effect of firm location on the relations of ROE, R&D, and firm SIZE with MARKET-TO-BOOK," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 388-409.
    10. David C. Ling & Andy Naranjo & Benjamin Scheick, 2021. "There is no place like home: Information asymmetries, local asset concentration, and portfolio returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(1), pages 36-74, March.
    11. Hong, Jieying, 2019. "Managerial compensation incentives and corporate debt maturity: Evidence from FAS 123R," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 388-414.
    12. Camelia M. Kuhnen & Alexandra Niessen, 2012. "Public Opinion and Executive Compensation," Management Science, INFORMS, vol. 58(7), pages 1249-1272, July.
    13. Kiyoung Chang & Ying Li & Ha‐Chin Yi, 2021. "Informed equity ownership and bank loan contracting," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(7-8), pages 1368-1403, July.
    14. Bulan, Laarni & Sanyal, Paroma & Yan, Zhipeng, 2010. "A few bad apples: An analysis of CEO performance pay and firm productivity," Journal of Economics and Business, Elsevier, vol. 62(4), pages 273-306, July.
    15. Kim, E. Han & Lu, Yao, 2011. "CEO ownership, external governance, and risk-taking," Journal of Financial Economics, Elsevier, vol. 102(2), pages 272-292.
    16. Çolak, Gönül & Korkeamäki, Timo, 2021. "CEO mobility and corporate policy risk," Journal of Corporate Finance, Elsevier, vol. 69(C).
    17. Edmans, Alex & Holderness, Clifford, 2016. "Blockholders: A Survey of Theory and Evidence," CEPR Discussion Papers 11442, C.E.P.R. Discussion Papers.
    18. Derouiche, Imen & Jaafar, Kaouther & Zemzem, Ahmed, 2016. "Firm geographic location and voluntary disclosure," Journal of Multinational Financial Management, Elsevier, vol. 37, pages 29-47.
    19. Yu‐Luen Ma & Yayuan Ren, 2021. "Insurer risk and performance before, during, and after the 2008 financial crisis: The role of monitoring institutional ownership," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 88(2), pages 351-380, June.
    20. Chen, Jie & Song, Wei & Goergen, Marc, 2019. "Passing the dividend baton: The impact of dividend policy on new CEOs' initial compensation," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 458-481.

    More about this item

    Keywords

    Institutional investors; Executive compensation; Strategic interactions; Executive pay disparity; Geography;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finmar:v:35:y:2017:i:c:p:65-83. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/finmar .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.