Agency versus Hold-up: Benefits and Costs of Shareholder Rights
55 Pages Posted: 26 Mar 2011 Last revised: 29 Apr 2017
Date Written: April 25, 2017
A set of policy experiments regarding binding say-on-pay 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 say-on-pay provides shareholders with an enhanced ability to ensure alignment. On the other hand, when shareholders can (partially) set pay 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. The direct-democratic process by which say-on-pay was introduced in Switzerland also highlights the conflicts between society and shareholders when it comes to executive compensation.
Keywords: Say-on-pay, event study, corporate governance, executive compensation
JEL Classification: G38, G34
Suggested Citation: Suggested Citation