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A Corporate Governance Reform as a Natural Experiment for Incentive Contracts

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  • Christian Bayer

    (University of Dortmund)

  • Carsten Burhop

    (University of Münster)

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.

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File URL: http://128.118.178.162/eps/fin/papers/0407/0407002.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0407002.

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Length: 23 pages
Date of creation: 05 Jul 2004
Date of revision:
Handle: RePEc:wpa:wuwpfi:0407002

Note: Type of Document - pdf; pages: 23
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Web page: http://128.118.178.162

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Keywords: pay-performance sensitivity; natural experiment; legal reform; corporate governance;

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References

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  10. Bengt Holmstrom, 1999. "Managerial Incentive Problems: A Dynamic Perspective," NBER Working Papers 6875, National Bureau of Economic Research, Inc.
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  13. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  14. Grossmann, Volker, 2003. "Managerial Job Assignment and Imperfect Competition in Asymmetric Equilibrium," IZA Discussion Papers 738, Institute for the Study of Labor (IZA).
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  17. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-31, July.
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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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