Financial Contracting and Operating Performance: The Case for OBRA and Efficient Contracting

Maisondieu-Laforge, Olivier J. P.; Kim, Yong H.; Kim, Young Sang

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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

See all articles by Olivier J. P. Maisondieu-Laforge

Olivier J. P. Maisondieu-Laforge

University of Nebraska at Omaha - Department of Finance, Banking & Law

Young Sang Kim

Northern Kentucky University - Haile/US Bank College of Business

Abstract

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

Maisondieu-Laforge, Olivier J. P. and Kim, Yong H. and Kim, Young Sang, Financial Contracting and Operating Performance: The Case for OBRA and Efficient Contracting. Corporate Ownership & Control, Vol. 4, No. 4, pp. 217-227, 2007, Available at SSRN: https://ssrn.com/abstract=942707