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A Corporate Governance Reform as a Natural Experiment for Incentive Contracts

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  • Christian Bayer
  • Carsten Burhop

Abstract

We use a major shift in the legal and institutional environment to identify contractual incentives from the correlation of executive pay and performance. We take the reform of the German stock companies act in 1884 as such a major shift, and estimate the sensitivity of pay to 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 decreases significantly after the reform. Executives received a bonus of M29 per M1,000, increasing profits before 1884, but after the reform the sensitivity decreased by two-thirds.

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Bibliographic Info

Article provided by LMU Munich School of Management in its journal Schmalenbach Business Review.

Volume (Year): 60 (2008)
Issue (Month): 4 (October)
Pages: 378-399

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Handle: RePEc:sbr:abstra:v:60:y:2008:i:4:p:378-399

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Keywords: Corporate Governance; Legal Reform; Natural Experiment; Pay-Performance Sensitivity;

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References

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  1. Conyon, Martin J., 1997. "Corporate governance and executive compensation," International Journal of Industrial Organization, Elsevier, vol. 15(4), pages 493-509, July.
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  14. Brian J. Hall & Jeffrey B. Liebman, 1998. "Are CEOs Really Paid Like Bureaucrats?," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 653-691, August.
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Cited by:
  1. Christian Bayer & Carsten Burhop, 2005. "If only I could sack you! Management turnover and performance in large German Banks between 1874 and 1913," Economic History 0502006, EconWPA.

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