Court Intervention as a Governance Mechanism Over CEO Pay: Evidence from the Citigroup Derivative Lawsuit
40 Pages Posted: 19 Mar 2014 Last revised: 7 Jan 2022
Date Written: April 14, 2014
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: Suggested Citation