Court Intervention as a Governance Mechanism Over CEO Pay: Evidence from the Citigroup Derivative Lawsuit

40 Pages Posted: 19 Mar 2014 Last revised: 21 May 2014

See all articles by Ana M. Albuquerque

Ana M. Albuquerque

Boston University Questrom School of Business

Mary Ellen Carter

Boston College - Department of Accounting

Luann J. Lynch

University of Virginia - Darden School of Business

Date Written: April 14, 2014

Abstract

We use an unanticipated court ruling in a lawsuit against Citigroup claiming corporate waste related to CEO pay to analyze court intervention as an alternative governance mechanism in cases of excess pay. We find a negative relation between announcement returns and excess pay, consistent with shareholders of these firms perceiving court intervention as net costly. However, we find a positive relation between announcement returns and excess pay accompanied by poor performance, suggesting that intervention is welcome when pay is more egregious. Finally, we find that firms with excess pay and whose shareholders welcome intervention reduce future pay relative to other firms, suggesting that the threat of court intervention is a potential mechanism to control excess pay.

Keywords: litigation, court intervention, executive compensation, investor protection, waste claim, Delaware, chancery court, corporate governance

JEL Classification: G14, G34, J33, K22, K40

Suggested Citation

Albuquerque, Ana M. and Carter, Mary Ellen and Lynch, Luann J., Court Intervention as a Governance Mechanism Over CEO Pay: Evidence from the Citigroup Derivative Lawsuit (April 14, 2014). European Accounting Review Forthcoming; Boston U. School of Management Research Paper No. 2410212. Available at SSRN: https://ssrn.com/abstract=2410212 or http://dx.doi.org/10.2139/ssrn.2410212

Ana M. Albuquerque

Boston University Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-358-4185 (Phone)
617-353-6667 (Fax)

Mary Ellen Carter (Contact Author)

Boston College - Department of Accounting ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Luann J. Lynch

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4721 (Phone)
434-243-7677 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/lynch.htm

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