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

55 Pages Posted: 26 Mar 2011 Last revised: 29 Apr 2017

Alexander F. Wagner

University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swiss Finance Institute

Christoph Wenk

University of Zurich - Department of Banking and Finance

Date Written: April 25, 2017

Abstract

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

Wagner, Alexander F. and Wenk, Christoph, Agency versus Hold-up: Benefits and Costs of Shareholder Rights (April 25, 2017). Swiss Finance Institute Research Paper No. 11-12; European Corporate Governance Institute (ECGI) - Finance Working Paper No. 500/2017. Available at SSRN: https://ssrn.com/abstract=1793089 or http://dx.doi.org/10.2139/ssrn.1793089

Alexander F. Wagner (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland
+41 44 634 3963 (Phone)

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Swiss Finance Institute ( email )

Switzerland

HOME PAGE: http://www.alex-wagner.com

Christoph Wenk

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

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