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Incentive alignment through performance-focused shareholder proposals on management compensation

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  • Fortin, Steve
  • Subramaniam, Chandra
  • Wang, Xu (Frank)
  • Zhang, Sanjian (Bill)

Abstract

We investigate an emerging pay-performance activism under a natural setting of performance-focused shareholder proposals rule (PSPs) (Rule 14a-8) established by the Securities and Exchange Commission (SEC) for top management compensation. We find that: (1) PSP sponsors successfully identify firms that suffer from a misalignment of managers and shareholders’ interests; (2) CEOs’ pay-for-performance sensitivity increases in the post-proposal period; and (3) shareholders benefit through positive stock returns as related to proposal filing dates; while (4) bondholders suffer significant negative returns and even more so for high-leverage firms. Our additional analyses suggest that perceived risk increase is the main driver of observed negative abnormal bond returns. However, we fail to find similar results for shareholder proposals not focused on performance (NPSPs). Collectively, our results indicate that shareholders benefit from this pay-performance activism through PSPs (but not NPSPs), but potentially at the expense of bondholders.

Suggested Citation

  • Fortin, Steve & Subramaniam, Chandra & Wang, Xu (Frank) & Zhang, Sanjian (Bill), 2014. "Incentive alignment through performance-focused shareholder proposals on management compensation," Journal of Contemporary Accounting and Economics, Elsevier, vol. 10(2), pages 130-147.
    • Handle: RePEc:eee:jocaae:v:10:y:2014:i:2:p:130-147
    DOI: 10.1016/j.jcae.2014.06.001
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    2. Bajzík, Josef & Havranek, Tomas & Irsova, Zuzana & Novak, Jiri, 2023. "Does Shareholder Activism Create Value? A Meta-Analysis," CEPR Discussion Papers 18233, C.E.P.R. Discussion Papers.
    3. Sudam Shingade & Shailesh Rastogi & Venkata Mrudula Bhimavarapu & Abhijit Chirputkar, 2022. "Shareholder Activism and Its Impact on Profitability, Return, and Valuation of the Firms in India," JRFM, MDPI, vol. 15(4), pages 1-20, March.
    4. Maul, D. & Schiereck, D., 2017. "The bond event study methodology since 1974," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 80723, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    5. Souha Bouaziz Siala & Anis Jarboui, 2019. "The moderating effect of audit quality on the relation between shareholder activism and earnings management: Evidence from France," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 13(1), March.
    6. Song Zhu & Haijie Huang & William Bradford, 2022. "The governance role of institutional investors in management compensation: evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(S1), pages 1015-1063, April.
    7. Bajzik, Josef, 2023. "Is the role of shareholder activism in corporate governance overestimated?," Finance Research Letters, Elsevier, vol. 58(PC).

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