Financial Contracting and Operating Performance: The Case for OBRA and Efficient Contracting
Corporate Ownership & Control, Vol. 4, No. 4, pp. 217-227, 2007
29 Pages Posted: 9 Nov 2006 Last revised: 11 Mar 2008
When corporate governance is effective, new managerial contracts should maximize shareholder wealth. This paper examines operating performance measures after the Omnibus Budget Reconciliation Act (OBRA) of 1993 was passed. We find that firms affected by OBRA's $1 million cap on cash compensation experience an improvement in operating performance during the three years following contract revisions. Although prior performance was low, the post-contracting performance for affected firms is on par with comparison group. These findings are consistent with effective corporate governance and efficient contracting and contrary to expropriation theory.
Keywords: Contracting, Expropriation, Corporate governance, OBRA, CEO, Operating performance
JEL Classification: G34, G35, G32, G38, J33
Suggested Citation: Suggested Citation