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

  • Bayer, Christian
  • Burhop, Carsten

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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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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