Incentive Realignment: Mutual Funds’ Influence on Executive Compensation Contracts

Using a regulation that increased portfolio disclosure frequency of US mutual funds as an exogenous shock shortening funds’ investment horizon, we examine whether and how affected funds influence portfolio firms to achieve horizon realignment after the shock. We find that portfolio firms reduce the pay duration of their executives to incentivize them to have shorter investment horizon. We then show that funds affect this change through both voice and exit channels, i.e., voting on compensation-related issues and divesting from portfolio firms. The effect is more pronounced when funds have lower trading costs and are larger (with more reputation/resources) and when fund managers have stronger career incentives and are less distracted. We thus provide novel evidence on how institutional investors achieve incentive realignment dynamically.

Keywords: Mutual Funds, Corporate Governance, Executive Compensation, Pay Duration, Incentive Horizon

JEL Classification: G12, G19, G23, G28, G30, J33, M12, M52

Suggested Citation: Suggested Citation

Agarwal, Vikas and Cao, Sean S. and Huang, Shawn X. and Kim, Min, Incentive Realignment: Mutual Funds’ Influence on Executive Compensation Contracts (February 15, 2023). Available at SSRN: https://ssrn.com/abstract=3784399 or http://dx.doi.org/10.2139/ssrn.3784399