Corporate Governance and Incentive Contracts: Historical Evidence from a Legal Reform

34 Pages Posted: 20 May 2008

See all articles by Christian Bayer

Christian Bayer

affiliation not provided to SSRN

Carsten Burhop

Max Planck Institute for Research on Collective Goods

Date Written: March 2008

Abstract

This paper proposes to exploit a reform in legal rules of corporate governance to identify contractual incentives from the correlation of executive pay and firm performance. In particular, we refer to a major shift in the legal and institutional environment, the reform of the German joint-stock companies act in 1884. We analyze a sample of executive pay for 46 firms for the years 1870 to 1911. In 1884, a law reform substantially enhanced corporate control, strengthened the monitoring incentives of shareholders, and reduced the discretionary power of executives in Germany. Pay-performance sensitivity decreased significantly after this reform. While executives received a bonus of about three to five per cent in profits before 1884, after the reform this parameter decreased to a profit share of about two per cent. At least the profit share that is eliminated by the reform must have been incentive pay before. This incentive mechanism was replaced by other elements of corporate governance.

Keywords: pay-performance sensitivity, natural experiment, legal reform, corporate governance

JEL Classification: G30, J33, N23

Suggested Citation

Bayer, Christian and Burhop, Carsten, Corporate Governance and Incentive Contracts: Historical Evidence from a Legal Reform (March 2008). MPI Collective Goods Preprint, No. 2008/11, Available at SSRN: https://ssrn.com/abstract=1133443 or http://dx.doi.org/10.2139/ssrn.1133443

Christian Bayer (Contact Author)

affiliation not provided to SSRN ( email )

Carsten Burhop

Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
110
Abstract Views
983
rank
355,839
PlumX Metrics