Incentive Realignment: Mutual Funds’ Influence on Executive Compensation Contracts

56 Pages Posted: 16 Feb 2021 Last revised: 21 Feb 2024

See all articles by Vikas Agarwal

Vikas Agarwal

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

Sean Cao

University of Maryland - Robert H. Smith School of Business

Shawn X. Huang

Arizona State University (ASU) - School of Accountancy

Min Kim

Sogang University

Date Written: February 15, 2023

Abstract

Using a regulation that increased portfolio disclosure frequency of US mutual funds as an exogenous shock shortening funds’ investment horizon, we examine whether and how affected funds influence portfolio firms to achieve horizon realignment after the shock. We find that portfolio firms reduce the pay duration of their executives to incentivize them to have shorter investment horizon. We then show that funds affect this change through both voice and exit channels, i.e., voting on compensation-related issues and divesting from portfolio firms. The effect is more pronounced when funds have lower trading costs and are larger (with more reputation/resources) and when fund managers have stronger career incentives and are less distracted. We thus provide novel evidence on how institutional investors achieve incentive realignment dynamically.

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, 2023). 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://vagarwal.gsucreate.org/

University of Cologne - Centre for Financial Research (CFR) ( email )

Albertus-Magnus Platz
Cologne, 50923
Germany

Sean S. Cao

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Shawn X. Huang

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

Tempe, AZ 85287
United States

Min Kim

Sogang University ( email )

Seoul 121-742
Korea, Republic of (South Korea)

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