Agency versus Hold-up: On the Impact of Binding Say-on-Pay on Shareholder Value
Alexander F. Wagner
University of Zurich - Department of Banking and Finance; Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
University of Zurich - Department of Banking and Finance
February 26, 2015
Swiss Finance Institute Research Paper No. 11-12
Many countries are planning to introduce new or to alter existing say-on-pay laws. The general thrust of recent regulatory developments in this respect is to further strengthen shareholder power. A set of policy experiments in Switzerland sheds light on the hitherto mostly theoretical argument that shareholders may, in fact, prefer to have limits on their own power. The empirical evidence suggests a trade-off: On the one hand, binding say-on-pay provides shareholders with an enhanced ability to ensure alignment. On the other hand, when shareholders can (partially) set pay ex post, this may distort ex ante managerial incentives for extra-contractual, firm-specific investments. Thus, shareholder power reduces agency costs, but accentuates hold-up problems. These findings inform the design of policy.
Number of Pages in PDF File: 40
Keywords: Say-on-pay, event study, corporate governance, executive compensation
JEL Classification: G38, G34
Date posted: March 26, 2011 ; Last revised: March 14, 2015
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