Passive Shareholders and Active Managers: An Empirical Test of Admati and Pfleiderer's Hypothesis
44 Pages Posted: 25 Feb 2007
Date Written: July 15, 2007
Admati and Pfleiderer (2006) demonstrate that under some conditions, linking CEO pay to share price performance may aggravate agency conflicts. Two fundamental conflicts are considered: the manager may take value-destroying, privately beneficial (bad) actions, or value-enhancing, privately costly (good) actions. Applying a structural equation model to a global data set, we find that when institutions encouraging good (bad) managerial conduct are lacking, CEO pay is more (less) strongly associated with share price performance. Our analysis suggests that the Wall Street Rule as a governance mechanism varies in its effectiveness to cope with different categories of agency conflict.
Keywords: stock market liquidity, shareholder control, shareholder activism, Wall Street Rule, corporate governance
JEL Classification: D80, D82, G23, G34, K22
Suggested Citation: Suggested Citation