Incentive Realignment: Mutual Funds’ Influence on Executive Compensation Contracts

Using a regulation that increased portfolio disclosure frequency of US mutual funds as an exogenous shock shortening funds’ investment horizon, we find that affected funds influence portfolio firms to reduce the pay duration of their executives to incentivize them to also have shorter investment horizon. We show that funds affect this change through both voice and exit channels, i.e., voting on compensation-related issues and divesting from portfolio firms. Cross-sectional tests corroborate these findings to reveal more pronounced effects when fund managers have stronger career incentives and are less distracted, and when funds are less concerned about free rider problems and share ownership with potentially supportive other short-term oriented investors.

Keywords: Mutual Funds, Corporate Governance, Executive Compensation, Pay Duration, Incentive Horizon

JEL Classification: G12, G19, G23, G28, G30, J33, M12, M52

Suggested Citation: Suggested Citation

Agarwal, Vikas and Cao, Sean S. and Huang, Shawn X. and Kim, Min, Incentive Realignment: Mutual Funds’ Influence on Executive Compensation Contracts (February 15, 2021). Available at SSRN: https://ssrn.com/abstract=3784399 or http://dx.doi.org/10.2139/ssrn.3784399