Do Concentrated Institutional Investors Really Reduce Executive Compensation Whilst Raising Incentives?

Smith, Gavin; Swan, Peter L.

doi:10.2139/ssrn.1009309

Download This Paper

Open PDF in Browser

Add Paper to My Library

Do Concentrated Institutional Investors Really Reduce Executive Compensation Whilst Raising Incentives?

UNSW Australian School of Business Research Paper No. 2012 BFIN 13

36 Pages Posted: 26 Mar 2008 Last revised: 6 Jul 2012

See all articles by Gavin Smith

Gavin Smith

University of New South Wales - School of Banking and Finance

Peter L. Swan

University of New South Wales (UNSW Sydney; Financial Research Network (FIRN)

Date Written: February 2, 2012

Abstract

Hartzell and Starks (2003) (HS) report that more concentrated institutional investing associates with higher pay-for-performance sensitivity and lower CEO pay. We find that institutional concentration has no effect on pay-for-performance sensitivity and increases compensation when we replicate their analysis using the logarithm of firm size instead of HS’ raw firm size as control. Moreover, HS results are sensitive to measuring concentration among institutions rather than concentration among shareholders. Finally, the HS concentration definition also appears to exacerbate firm-size effects. Overall, HS results may be primarily due to what appear to be weak firm-size controls and not due to institutional monitoring.

Keywords: Executive compensation, Monitoring, Institutional ownership, Principal-agent, Incentives

JEL Classification: G23, G32, G34, J33

Suggested Citation: Suggested Citation

Smith, Gavin and Swan, Peter Lawrence, Do Concentrated Institutional Investors Really Reduce Executive Compensation Whilst Raising Incentives? (February 2, 2012). UNSW Australian School of Business Research Paper No. 2012 BFIN 13, Available at SSRN: https://ssrn.com/abstract=1009309 or http://dx.doi.org/10.2139/ssrn.1009309