Incentive Alignment through Performance-Focused Shareholder Proposals on Management Compensation

Journal of Contemporary Accounting and Economics, Forthcoming

53 Pages Posted: 24 Dec 2011 Last revised: 29 May 2014

See all articles by Steve Fortin

Steve Fortin

University of Waterloo - School of Accounting and Finance

Chandra Subramaniam

California State University, Northridge - David Nazarian College of Business and Economics

Xu (Frank) Wang

Saint Louis University - Chaifetz School of Business

Sanjian Bill Zhang

California State University Long Beach

Date Written: May 28, 2014

Abstract

We investigate an emerging pay-performance activism under a natural setting of performance-focused shareholder proposals rule (PSPs) (Rule 14a-8) established by the Securities and Exchange Commission (SEC) for top management compensation. We find that: (1) PSP sponsors successfully identify firms that suffer from a misalignment of managers and shareholders’ interests; (2) CEOs’ pay-for-performance sensitivity increases in the post-proposal period; and (3) shareholders benefit through positive stock returns as related to proposal filing dates; while (4) bondholders suffer significant negative returns and even more so for high-leverage firms. Our additional analyses suggest that perceived risk increase is the main driver of observed negative abnormal bond returns. However, we fail to find similar results for shareholder proposals not focused on performance (NPSPs). Collectively, our results indicate that shareholders benefit from this pay-performance activism through PSPs (but not NPSPs), but potentially at the expense of bondholders.

Keywords: Bond Market Reaction, Shareholder Proposal, Incentive Compensation, Pay for Performance

JEL Classification: M4, G30, M52

Suggested Citation

Fortin, Steve and Subramaniam, Chandra and Wang, Xu (Frank) and Zhang, Sanjian, Incentive Alignment through Performance-Focused Shareholder Proposals on Management Compensation (May 28, 2014). Journal of Contemporary Accounting and Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1975973 or http://dx.doi.org/10.2139/ssrn.1975973

Steve Fortin

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

Chandra Subramaniam

California State University, Northridge - David Nazarian College of Business and Economics ( email )

Northridge, CA 91330
United States

Xu (Frank) Wang (Contact Author)

Saint Louis University - Chaifetz School of Business ( email )

3674 Lindell Blvd
St. Louis, MO 63108-3397
United States

Sanjian Zhang

California State University Long Beach ( email )

1250 Bellflower Blvd.
Long Beach, CA 90840
United States

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