The Determinants and Consequences of Pay-Performance Activism - Evidence from Shareholder Proposals

• In Event: Executive Compensation II

Abstract

By investigating an emerging pay-performance activism using a natural setting of performance-focused shareholder proposals (PSPs) concerning top management compensation, we document that: (1) PSP sponsors successfully identify firms that suffer from a misalignment of managers and shareholders’ interests; (2) CEOs’ pay-for-performance sensitivity increases in the post-proposal period; and (3) shareholders benefit through positive stock returns surrounding proposal filing dates; while (4) bondholders suffer significant negative returns, and even more so for high leverage firms. We also find an increase in stock return volatility but no significant changes to analyst forecasts of annual earnings surrounding proposal filling dates. These results imply that perceived risk increase is the main driver of observed negative abnormal bond returns. Further analysis shows that PSPs are significantly different from other shareholder proposals that are not focused on performance. Collectively, our results indicate that shareholders benefit from this emerging pay-performance activism, but potentially at the expense of bondholders.

Authors

• Steve Fortin, McGill University

• Chandra Subramaniam, The University of Texas at Arlington

• Xu Wang, Saint Louis University

• Sanjian Zhang, McGill University