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Market Reactions to the Regulation of Executive Compensation

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  • J�rg-Markus Hitz
  • Stephanie M�ller-Bloch

Abstract

This paper investigates equity market reactions to the regulation of executive compensation. We exploit a natural experimental setting in Germany, where recent legislation introduces restrictions on the amount and on the components of board executive compensation packages, and invokes liability for the supervisory board in case of inappropriate remuneration arrangements. We use this exogenous shock to the contracting environment to infer market perceptions of the usefulness of the regulation. Using event study methodology, we investigate market reactions for the first-time announcement of regulatory intent and for a pooled sample of seven events leading to the adoption of the law act. We find weak evidence of an average negative market reaction to the proposed regulation. Multivariate analyses reveal that firms which were particularly affected by the regulation because board members received high abnormal remuneration experienced larger stock price discounts on average. Consistent with this, we find a positive relation between pay-performance sensitivity and the equity market reaction. Taken together, these findings indicate that the regulation was not considered beneficial from a shareholder perspective. This result is consistent with the market perceiving the regulation of executive compensation to impose potentially inefficient contractual arrangements for some firms.

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  • J�rg-Markus Hitz & Stephanie M�ller-Bloch, 2015. "Market Reactions to the Regulation of Executive Compensation," European Accounting Review, Taylor & Francis Journals, vol. 24(4), pages 659-684, December.
    • Handle: RePEc:taf:euract:v:24:y:2015:i:4:p:659-684
    DOI: 10.1080/09638180.2015.1012222
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    Cited by:

    1. Peter Krenn, 2017. "The Impact of Taxes on Competition for CEOs," European Accounting Review, Taylor & Francis Journals, vol. 26(3), pages 503-530, July.
    2. Daniel Beck & Gunther Friedl & Peter Schäfer, 2020. "Executive compensation in Germany," Journal of Business Economics, Springer, vol. 90(5), pages 787-824, June.
    3. Pamela Kent & Kim Kercher & James Routledge, 2018. "Remuneration committees, shareholder dissent on CEO pay and the CEO pay–performance link," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(2), pages 445-475, June.
    4. Powell, Daniel & Rapp, Marc Steffen, 2015. "Non-mandatory say on pay votes and AGM participation: Evidence from Germany," SAFE Working Paper Series 107, Leibniz Institute for Financial Research SAFE.
    5. James Borthwick & Aelee Jun & Shiguang Ma, 2020. "Changing board behaviour: The role of the ‘Two Strikes’ rule in improving the efficacy of Australian Say‐on‐Pay," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(S1), pages 827-876, April.
    6. Belén Díaz Díaz & Rebeca García‐Ramos & Myriam García Olalla, 2020. "Does regulating remuneration affect the market value of European Union banks? Large versus small/medium sized banks," Regulation & Governance, John Wiley & Sons, vol. 14(1), pages 150-164, January.
    7. Aust, Viktoria & Pelger, Christoph & Drefahl, Christian, 2021. "Exploring the relationship between valuation and stewardship uses of accounting information: Empirical evidence from German listed firms," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 42(C).
    8. Belén Díaz Díaz & Rebeca García-Ramos & Myriam García-Olalla, 2017. "Shareholder wealth responses to European legislation on bank executive compensation," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 20(3), pages 271-291, July.

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