Universal Demand Laws and Compensation

Posted: 7 May 2020

See all articles by Mark Humphery-Jenner

Mark Humphery-Jenner

UNSW Business School; Financial Research Network (FIRN)

Emdad Islam

Monash University

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Lubna Rahman

Monash University

Date Written: May 10, 2019


How do firms respond to a regulatory induced increase in managerial entrenchment? We use the staggered passage of Universal Demand (UD) laws as a natural experiment with which to answer this question. Universal demand laws insulate managers from derivative litigations, thereby entrenching them from a form of external discipline, which would facilitate shirking and reduces managerial discipline. We hypothesize and show that firms respond to this by increasing risk-taking incentives. This effect is stronger in firms with more institutional investors (who might pressure for compensation changes) but weaker in high competition industries (where competition itself can mitigate a deterioration in governance). Institutional investors also help to prevent entrenched managers taking advantage of UD laws’ insulating effect. We take steps to mitigate endogeneity, identification, and other econometric concerns.

Keywords: Universal Demand Law, Compensation, Litigation, Corporate Governance

JEL Classification: G34

Suggested Citation

Humphery-Jenner, Mark and Islam, Md Emdadul and Nanda, Vikram K. and Rahman, Lubna, Universal Demand Laws and Compensation (May 10, 2019). Available at SSRN: https://ssrn.com/abstract=3574393

Mark Humphery-Jenner (Contact Author)

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane

HOME PAGE: http://www.firn.org.au

Md Emdadul Islam

Monash University ( email )

Wellington Road
Clayton, Victoria 3168

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Lubna Rahman

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800

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