Corporate governance and incentive contracts: Historical evidence from a legal reform

Christian Bayer and Carsten Burhop

Explorations in Economic History, 2009, vol. 46, issue 4, 464-481

Abstract: This paper proposes to exploit a reform in legal rules of corporate governance to identify contractual incentives from the correlation of executive pay and firm performance. In particular, we refer to a major shift in the legal and institutional environment, the reform of the German joint-stock companies act in 1884. We analyze a sample of executive pay for 46 firms for the years 1870-1911. In 1884, a legal reform substantially enhanced corporate control, strengthened the monitoring incentives of shareholders, and reduced the discretionary power of executives in Germany. The pay-performance sensitivity decreased significantly after this reform. While executives received a bonus of about 3-5% in profits before 1884, after the reform this parameter decreased to a profit share of about 2%. At least the profit share that is eliminated by the reform most likely was incentive pay before. This incentive mechanism was replaced by other elements of corporate governance.

Keywords: N23; G30; J33; History; of; corporate; governance; Germany; Pay-performance; sensitivity; Natural; experiment; Legal; reform (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (9)

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Working Paper: Corporate Governance and Incentive Contracts: Historical Evidence from a Legal Reform (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:exehis:v:46:y:2009:i:4:p:464-481

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