Agency versus Hold-up: Benefits and Costs of Shareholder Rights
63 Pages Posted: 26 Mar 2011 Last revised: 13 May 2019
Date Written: April 12, 2019
A set of policy experiments regarding binding votes on compensation in Switzerland sheds light on the hitherto mostly theoretical 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 provide shareholders with an enhanced ability to ensure alignment. 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
Suggested Citation: Suggested Citation