Active Institutional Shareholders and Costs of Monitoring: Evidence from Executive Compensation

Active Institutional Shareholders and Costs of Monitoring: Evidence from Executive Compensation Although evidence suggests that institutional investors play a role in monitoring management, not all institutions are equally willing or able to serve this function. We present a stylized model that examines the effects of institutional monitoring on executive compensation. The model predicts that institutions' influence on managers' pay‐for‐performance sensitivity and level of compensation is enhanced when institutions have lower implied costs of monitoring, but that these effects are attenuated when the firm‐specific cost of monitoring is high. Our empirical results are broadly consistent with these implications, suggesting that independent investment advisors and investment company managers have advantages in monitoring firms' management. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Financial Management Wiley

Active Institutional Shareholders and Costs of Monitoring: Evidence from Executive Compensation

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Publisher
Wiley
Copyright
Copyright © 2005 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0046-3892
eISSN
1755-053X
D.O.I.
10.1111/j.1755-053X.2005.tb00116.x
Publisher site
See Article on Publisher Site

Abstract

Although evidence suggests that institutional investors play a role in monitoring management, not all institutions are equally willing or able to serve this function. We present a stylized model that examines the effects of institutional monitoring on executive compensation. The model predicts that institutions' influence on managers' pay‐for‐performance sensitivity and level of compensation is enhanced when institutions have lower implied costs of monitoring, but that these effects are attenuated when the firm‐specific cost of monitoring is high. Our empirical results are broadly consistent with these implications, suggesting that independent investment advisors and investment company managers have advantages in monitoring firms' management.

Journal

Financial ManagementWiley

Published: Dec 1, 2005

References

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