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Monitoring Versus Bonding: Shareholder Rights and Management Compensation

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  • Robert L. Lippert
  • William T. Moore

Abstract

Using a sample of nearly 700 firms, we documented a significant level of substitution between monitoring efforts by shareholders and bonding of Chief Executive Officers' (CEO)compensation with shareholder wealth. Direct shareholder monitoring effectiveness is measured by various dimensions of voting rights, e.g., equal voting, cumulative voting, and confidential voting. Indirect monitoring is measured by the degree of independence of the board of directors. Bonding of CEO compensation with shareholder wealth is gauged by a new pay-performance sensitivity measure that incorporates volatility in firm value. The results are consistent with prediction of agency theory that compensation contracts are designed to reduce the owner-manager conflict.

Suggested Citation

  • Robert L. Lippert & William T. Moore, 1995. "Monitoring Versus Bonding: Shareholder Rights and Management Compensation," Financial Management, Financial Management Association, vol. 24(3), Fall.
  • Handle: RePEc:fma:fmanag:lippert95
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    Cited by:

    1. Nigel Driffield & Vidya Mahambare & Sarmistha Pal, 2007. "How does ownership structure affect capital structure and firm value?," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 15, pages 535-573, July.
    2. Keith D. Harvey & Ronald E. Shrieves, 2001. "Executive Compensation Structure And Corporate Governance Choices," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 24(4), pages 495-512, December.
    3. Baek, H. Young, 2004. "Corporate diversification and performance: evidence on production efficiency," Journal of Multinational Financial Management, Elsevier, vol. 14(2), pages 135-152, April.
    4. Mishra, Chandra S. & McConaughy, Daniel L. & Gobeli, David H., 2000. "Effectiveness of CEO pay-for-performance," Review of Financial Economics, Elsevier, vol. 9(1), pages 1-13.
    5. Nigel Driffield & Sarmistha Pal, 2007. "How Does Ownership Structure Affect Capital Structure and Firm Value? Recent Evidence from East Asia," CEDI Discussion Paper Series 07-04, Centre for Economic Development and Institutions(CEDI), Brunel University.
    6. Chen, Chao-Jung & Hsu, Chung-Yuan & Chen, Yu-Lin, 2014. "The impact of family control on the top management compensation mix and incentive orientation," International Review of Economics & Finance, Elsevier, vol. 32(C), pages 29-46.
    7. Steve Sauerwald & Zhiang (John) Lin & Mike W. Peng, 2016. "Board social capital and excess CEO returns," Strategic Management Journal, Wiley Blackwell, vol. 37(3), pages 498-520, March.
    8. Belanès, Amel & Saihi, Malek, 2016. "Evidence on complementarity and substitution contingency in monitoring and bonding mechanisms," Research in International Business and Finance, Elsevier, vol. 38(C), pages 161-171.
    9. Bulan, Laarni & Sanyal, Paroma & Yan, Zhipeng, 2010. "A few bad apples: An analysis of CEO performance pay and firm productivity," Journal of Economics and Business, Elsevier, vol. 62(4), pages 273-306, July.
    10. Munisi, Gibson & Randøy, Trond, 2013. "Corporate governance and company performance across Sub-Saharan African countries," Journal of Economics and Business, Elsevier, vol. 70(C), pages 92-110.

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