Do Shareholders Benefit from the Adoption of Incentive Pay for Directors?

Abstract:     
We assess the stock market reaction to proposals of incentive plans for directors in a sample of 289 firms. We note a reaction that is both economically and statistically insignificant. This result suggests that shareholders do not necessarily benefit from the adoption of such plans. Across firms we find that the market reaction depends on whether the CEO is involved in director selection. We find that stock markets react negatively to plans proposed by firms without nomination committees. Our findings highlight the important link between corporate governance and the effectiveness of director incentive plans.

Number of Pages in PDF File: 33

Keywords: Board of Directors, Corporate Governance, Incentive Compensation

JEL Classification: G3, G34

working papers series