Critical Finance Review > Vol 3 > Issue 1

Do Concentrated Institutional Investors Really Reduce Executive Compensation Whilst Raising Incentives?

Gavin S. Smith, Macquarie Capital, gavin.smith@macquarie.com , Peter L. Swan, School of Banking and Finance, University of New South Wales, Australia, peter.swan@unsw.edu.au
 
Suggested Citation
Gavin S. Smith and Peter L. Swan (2014), "Do Concentrated Institutional Investors Really Reduce Executive Compensation Whilst Raising Incentives?", Critical Finance Review: Vol. 3: No. 1, pp 49-83. http://dx.doi.org/10.1561/104.00000014

Publication Date: 09 Jan 2014
© 2013 G. S. Smith and P. L. Swan
 
Subjects
Corporate finance,  Executive compensation,  Management structure, governance and performance,  Estimation frameworks,  Financial econometrics,  Hypothesis testing,  Panel data,  Robust estimation,  Econometric models,  Time series analysis,  Labor economics,  Principal-agent
 
Keywords
G23G32J33
Executive compensationMonitoringInstitutional ownershipPrincipal-agentIncentivesConcentrated ownership
 

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In this article:
1. Introduction 
2. Data and Variables 
3. Size-Based Classifications 
4. Executive Incentives as a Function of Institutional Investor Influence 
5. Institutional Investor Influence and the Level of Executive Compensation 
6. Previous Research 
7. Conclusions 
References 

Abstract

Hartzell and Starks (HS) (2013) report that firms with more concentrated institutional investors pay executives less, and make this pay more sensitive to performance. In an extended data set covering 1992 to 2010, we find that institutional concentration has no such effects when we control for firm size with a logarithmically transformed market-capitalization instead of HS's raw market-capitalization. This holds both in the long-run time-series and in the panel analysis. Firms that HS consider monitored do not seem to have better control of managerial compensation or performance than their unmonitored counterparts. Our results are, on the whole, inconsistent with any form of concentrated institutional monitoring.

DOI:10.1561/104.00000014