Connected Companies' Compensation

Abstract:     
When portfolio managers trade the stocks of companies run by people with whom they have social connections, these trades earn better returns than trades in companies with whom they have no connections (Cohen et al., 2008). We look at the effects of social connections from the firm's side, examining the compensation of firm executives. Executive compensation in connected firms is substantially higher than in unconnected firms. The channel through which this result occurs appears to be share voting-connected funds are more likely to vote against shareholder-initiated proposals on executive compensation, thereby protecting their cronies from the discipline of corporate governance. The evidence is consistent with higher compensation being the quid pro quo for information flow from firm to fund.

Keywords: executive compensation, social connections, share voting

JEL Classifications: G34

Working Paper Series