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Say-on-Pay and the Differential Effects of Voluntary Versus Mandatory Regimes on Investor Perceptions and Behavior

42 Pages Posted: 18 Aug 2010 Last revised: 5 May 2012

Kendall Bowlin

University of Mississippi - Patterson School of Accountancy

Margaret H. Christ

University of Georgia - Terry College of Business

Jeremy B. Griffin

University of Notre Dame - Mendoza College of Business

Date Written: May 4, 2012

Abstract

Say-on-pay is a corporate governance mechanism through which investors cast a non-binding vote on executive compensation. Using an interactive-laboratory experiment, we examine the influence of say-on-pay on investors’ perceptions of procedural fairness, their trust in boards of directors, and their willingness to invest in firms. We consider the effects of say-on-pay both when firms invite say-on-pay voluntarily — which is analogous to the former governance regime — and also when say-on-pay is mandated by law, as recently enacted by the United States Congress. We provide evidence that giving investors a voice in setting executive compensation (i.e., permitting say-on-pay) improves investors’ perceptions of the fairness of compensation-setting procedures, which leads to greater investor trust in boards of directors and increases their willingness to invest. However, we find that say-on-pay’s positive effect on investor behavior is greater when boards give their investors a voice voluntarily than when they are mandated to do so. Further, we find that investors react negatively when directors’ compensation decisions do not conform to investors’ expressed say-on-pay preference.

Keywords: say-on-pay, executive compensation, corporate governance, control systems

JEL Classification: M41, M12, M48, M52

Suggested Citation

Bowlin, Kendall and Christ, Margaret H. and Griffin, Jeremy B., Say-on-Pay and the Differential Effects of Voluntary Versus Mandatory Regimes on Investor Perceptions and Behavior (May 4, 2012). AAA 2011 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=1659862 or http://dx.doi.org/10.2139/ssrn.1659862

Kendall O. Bowlin

University of Mississippi - Patterson School of Accountancy ( email )

Oxford, MS 38677
United States

Margaret H. Christ (Contact Author)

University of Georgia - Terry College of Business ( email )

Athens, GA 30602-6254
United States
706-542-3602 (Phone)

Jeremy B. Griffin

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

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