Institutional Investors and Executive Compensation (.pdf)

article by Hartzell and Starks finds that as institutional ownership goes up, the firm is more likely to use pay for performance plans. Additionally, the level of CEO pay tends to go down. These findings suggest that institutional investors make better monitors than ordinary investors do. Possibly more convincing however, (since it solves the endogenity problem which is that is the institutional investors may select which stocks that pay for performance and pay managers less) is their analysis that finds as managerial ownership goes up, pay goes down relative to control groups in the periods that follow. [FinanceProfessor Annotation]

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