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The effect of minority veto rights on controller pay tunneling

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  • Fried, Jesse M.
  • Kamar, Ehud
  • Yafeh, Yishay

Abstract

A central challenge in the regulation of controlled firms is curbing rent extraction by controllers. As independent directors and fiduciary duties are often insufficient, some jurisdictions give minority shareholders veto rights over related-party transactions. To assess these rights’ effectiveness, we exploit a 2011 Israeli reform that gave minority shareholders veto rights over related-party transactions, including the pay of controllers and their relatives (“controller executives”). We find that the reform curbed controller-executive pay and led some controller executives to resign or go with little or no pay in circumstances suggesting their pay would be rejected. These findings suggest that minority veto rights can be an effective corporate governance tool.

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  • Fried, Jesse M. & Kamar, Ehud & Yafeh, Yishay, 2020. "The effect of minority veto rights on controller pay tunneling," Journal of Financial Economics, Elsevier, vol. 138(3), pages 777-788.
    • Handle: RePEc:eee:jfinec:v:138:y:2020:i:3:p:777-788
    DOI: 10.1016/j.jfineco.2020.06.015
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    11. Fried, Jesse M. & Spamann, Holger, 2020. "Cheap-stock tunneling around preemptive rights," Journal of Financial Economics, Elsevier, vol. 137(2), pages 353-370.
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    More about this item

    Keywords

    Controlling shareholders; Executive compensation; Related-party transactions; Shareholder voting; Tunneling;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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