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

Smith, Gavin; Swan, Peter L.

doi:10.2139/ssrn.1096998

Download This Paper

Open PDF in Browser

Add Paper to My Library

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: 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