Incentive Realignment: Mutual Funds’ Influence on Executive Compensation Contracts
50 Pages Posted: 16 Feb 2021 Last revised: 30 Mar 2021
Date Written: February 15, 2021
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