Financial Management · 1995 · 12 citations · 0 references
ManagementCorporate GovernanceFinanceAgency TheoryExecutive CompensationShareholder RightsAgency ConflictsAgency CostsBoard IndependenceEquity CompensationOwnership StructureShareholder-manager ConflictsAgency Conflicts Between ShareholdersAgency Cost TheoryBondingCompensation Contract DesignCompensation Performance SensitivityFirm Value EffectsOwner-manager RelationshipsPay-for-performance Sensitivity
Using a sample of nearly 700 firms, we documented a significant level of substitution between monitoring efforts by shareholders and bonding of Chief Executive Officers' (CEO)compensation with shareholder wealth. Direct shareholder monitoring effectiveness is measured by various dimensions of voting rights, e.g., equal voting, cumulative voting, and confidential voting. Indirect monitoring is measured by the degree of independence of the board of directors. Bonding of CEO compensation with shareholder wealth is gauged by a new pay-performance sensitivity measure that incorporates volatility in firm value. The results are consistent with prediction of agency theory that compensation contracts are designed to reduce the owner-manager conflict.