Agency versus Hold-up: Shareholder Rights and Shareholder Value

Abstract

A set of policy experiments regarding binding votes on compensation in Switzerland sheds new light on the argument that shareholders may prefer to have limits on their own power. The empirical evidence suggests a trade-off: On the one hand, binding votes on compensation amounts enhance alignment of management interests with shareholders. On the other hand, when shareholders can (partially) set pay levels ex post, this may distort ex ante managerial incentives for extra-contractual, firm-specific investments. Thus, increased shareholder power reduces agency costs, but accentuates hold-up problems. These findings inform the design of policy.

Keywords: say-on-pay, event study, corporate governance, executive compensation

JEL Classification: G38, G34