Does Pay Activism Pay Off for Shareholders? Shareholder Democracy and Its Discontents

Sudipto Dasgupta () and Thomas H. Noe ()
Additional contact information
Sudipto Dasgupta: Department of Finance, Chinese University of Hong Kong, Shatin, Hong Kong; Lancaster University, Lancaster, LA1 4YX, United Kingdom; Center for Economic Policy Research, Washington, DC 20009
Thomas H. Noe: Saïd Business School and Balliol College, University of Oxford, Oxford OX1 3BJ, United Kingdom

Management Science, 2019, vol. 65, issue 4, 1810-1832

Abstract: Typically, shareholders are not sure whether boards act in their interest or have been captured by management. They are also less well informed than boards about firm investment opportunities and operating conditions. We develop a model, consistent with these observations, in which discretionary compensation payments to managers might increase firm value or might simply enrich managers at the expense of shareholders. After observing the board’s compensation and investment policies, shareholders use Bayes’s rule to update the probability that the board is captured. Shareholders are “outraged” if this updated probability is sufficiently large. Outrage is costly for the board. Shareholder democracy, by enabling outrage to constrain board actions, typically lowers firm value relative to either governance regimes that insulate boards from shareholder outrage or regimes that ban discretionary compensation altogether.

Keywords: governance; shareholder activism; executive compensation; discretionary pay; charter amendments (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://doi.org/10.1287/mnsc.2017.2854 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:65:y:2019:i:4:p:1810-1832

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().