Incentive Realignment: Mutual Funds’ Influence on Executive Compensation Contracts

50 Pages Posted: 16 Feb 2021 Last revised: 30 Mar 2021

See all articles by Vikas Agarwal

Vikas Agarwal

Georgia State University; University of Cologne - Centre for Financial Research (CFR)

Sean Cao

Georgia State University - J. Mack Robinson College of Business

Shawn X. Huang

Arizona State University (ASU) - School of Accountancy

Min Kim

Arizona State University (ASU) - W.P. Carey School of Business

Date Written: February 15, 2021

Abstract

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

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

Vikas Agarwal (Contact Author)

Georgia State University ( email )

35 Broad Street,
Suite 1221
Atlanta, GA 30303-3083
United States
404-413-7326 (Phone)
404-413-7312 (Fax)

HOME PAGE: http://www.gsu.edu/~fncvaa

University of Cologne - Centre for Financial Research (CFR)

Albertus-Magnus Platz
Cologne, 50923
Germany

Sean S. Cao

Georgia State University - J. Mack Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States

Shawn X. Huang

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

Min Kim

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

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