Will the Real Monitors Please Stand Up?: Institutional Investors and CEO Compensation

47 Pages Posted: 26 Mar 2008

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 21, 2008

Abstract

We investigate monitoring of CEO incentives and pay levels by institutional investors. Consistent with the microstructural monitoring equilibrium of Noe (2002), we show that option-grant pay-performance sensitivity is positively related to institutional trading intensity. Trading intensity also raises CEO pay. This is to be expected with preservation of reservation CEO utility levels. Institutions with the smallest holdings and highest portfolio turnover rates have the largest positive effects on compensation levels. This is also consistent with Noe's equilibrium. Our OLS results are robust to firm random and fixed firm effects and potential endogeneity problems.

Keywords: Incentives, CEO compensation, Institutional investor monitoring

JEL Classification: G23, G32, J33

Suggested Citation

Smith, Gavin and Swan, Peter Lawrence, Will the Real Monitors Please Stand Up?: Institutional Investors and CEO Compensation (February 21, 2008). Available at SSRN: https://ssrn.com/abstract=1096998 or http://dx.doi.org/10.2139/ssrn.1096998

Gavin Smith

University of New South Wales - School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Peter Lawrence Swan (Contact Author)

University of New South Wales (UNSW Sydney ( email )

School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
Australia
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)

HOME PAGE: http://https://www.business.unsw.edu.au/our-people/peterswan

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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