A Corporate Governance Reform as a Natural Experiment for Incentive Contracts

Christian Bayer and Carsten Burhop
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Carsten Burhop: University of Münster

Finance from University Library of Munich, Germany

Abstract: The present paper proposes to employ a major shift in the legal and institutional environment to identify contractual incentives from the correlation of executive pay and firm performance. We use the reform of the German stock companies act in 1884 as such a major shift and estimate the sensitivity of the pay to firm performance between 1870 and 1910 for executives of nine large banks. The reform substantially enhanced corporate control and strengthened monitoring incentives. Accordingly, we find the pay-performance sensitivity to decrease significantly after the reform. While executives received a bonus of 39 M per 1000 M increase in profits before 1884, after the reform the sensitivity decreased by two-thirds.

Keywords: pay-performance sensitivity; natural experiment; legal reform; corporate governance (search for similar items in EconPapers)
JEL-codes: G30 J33 N23 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2004-07-05
New Economics Papers: this item is included in nep-acc
Note: Type of Document - pdf; pages: 23
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: A Corporate Governance Reform as a Natural Experiment for Incentive Contracts (2008)
Working Paper: A Corporate Governance Reform As A Natural Experiment For Incentive Contracts (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0407002

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