Agency versus Hold-up: Benefits and Costs of Shareholder Rights

Abstract

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