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A Corporate Governance Reform as a Natural Experiment for Incentive Contracts

  • Christian Bayer
  • Carsten Burhop

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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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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  1. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-83, June.
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  7. Lazear, Edward, 2003. "Output-Based Pay: Incentives, Retention or Sorting?," IZA Discussion Papers 761, Institute for the Study of Labor (IZA).
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  9. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
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