Active Institutional Shareholders and Costs of Monitoring: Evidence from Executive Compensation

30 Pages Posted: 13 Dec 2005

See all articles by Andres Almazan

Andres Almazan

University of Texas at Austin - Department of Finance

Jay C. Hartzell

University of Texas at Austin - Department of Finance

Laura T. Starks

University of Texas at Austin - Department of Finance

Multiple version iconThere are 2 versions of this paper

Abstract

Although evidence suggests that institutional investors play a role in monitoring management, not all institutions are equally willing or able to serve this function. We present a stylized model that examines the effects of institutional monitoring on executive compensation. The model predicts that institutions' influence on managers' pay-for-performance sensitivity and level of compensation is enhanced when institutions have lower implied costs of monitoring, but that these effects are attenuated when the firm-specific cost of monitoring is high. Our empirical results are broadly consistent with these implications, suggesting that independent investment advisors and investment company managers have advantages in monitoring firms' management.

Suggested Citation

Almazan, Andres and Hartzell, Jay C. and Starks, Laura T., Active Institutional Shareholders and Costs of Monitoring: Evidence from Executive Compensation. Financial Management, Vol. 34, No. 4, Winter 2005. Available at SSRN: https://ssrn.com/abstract=869630

Andres Almazan

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-4368 (Phone)
512-471-5073 (Fax)

HOME PAGE: http://www.mccombs.utexas.edu/dept/finance/faculty/profiles/index.asp?addTarget=4

Jay C. Hartzell

University of Texas at Austin - Department of Finance ( email )

1 University Station B6600
Austin, TX 78712
United States
512-471-6779 (Phone)
512-471-5073 (Fax)

HOME PAGE: http://www.mccombs.utexas.edu/faculty/jay.hartzell/

Laura T. Starks (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-5899 (Phone)
512-471-5073 (Fax)

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