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

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  • Bayer, Christian
  • Burhop, Carsten

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.

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Bibliographic Info

Article provided by Elsevier in its journal Explorations in Economic History.

Volume (Year): 46 (2009)
Issue (Month): 4 (October)
Pages: 464-481

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Handle: RePEc:eee:exehis:v:46:y:2009:i:4:p:464-481

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Web page: http://www.elsevier.com/locate/inca/622830

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Keywords: N23 G30 J33 History of corporate governance Germany Pay-performance sensitivity Natural experiment Legal reform;

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Cited by:
  1. Benjamin E. Hermalin & Michael S. Weisbach, 2012. "Information Disclosure and Corporate Governance," Journal of Finance, American Finance Association, vol. 67(1), pages 195-234, 02.
  2. Foreman-Peck, James & Hannah, Leslie, 2011. "Extreme Divorce: the Managerial Revolution in UK Companies before 1914," Cardiff Economics Working Papers E2011/21, Cardiff University, Cardiff Business School, Economics Section.
  3. Sun, Bo, 2014. "Executive compensation and earnings management under moral hazard," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 276-290.

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