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Corporate Governance and Incentive Contracts: Historical Evidence from a Legal Reform

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  • Christian Bayer

    () (IGIER – Università Commerciale Luigi Bocconi, Italy)

  • Carsten Burhop

    () (Max Planck Institute for Research on Collective Goods)

Abstract

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 to 1911. In 1884, a law reform substantially enhanced corporate control, strengthened the monitoring incentives of shareholders, and reduced the discretionary power of executives in Germany. Pay-performance sensitivity decreased significantly after this reform. While executives received a bonus of about three to five per cent in profits before 1884, after the reform this parameter decreased to a profit share of about two per cent. At least the profit share that is eliminated by the reform must have been incentive pay before. This incentive mechanism was replaced by other elements of corporate governance.

Suggested Citation

  • Christian Bayer & Carsten Burhop, 2008. "Corporate Governance and Incentive Contracts: Historical Evidence from a Legal Reform," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2008_11, Max Planck Institute for Research on Collective Goods.
  • Handle: RePEc:mpg:wpaper:2008_11
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    Cited by:

    1. Benjamin E. Hermalin & Michael S. Weisbach, 2012. "Information Disclosure and Corporate Governance," Journal of Finance, American Finance Association, vol. 67(1), pages 195-234, February.
    2. Sebastian A.J. Keibek, 2016. "Using probate data to determine historical male occupational structures," Working Papers 26, Department of Economic and Social History at the University of Cambridge, revised 21 Mar 2017.
    3. Foreman-Peck, James & Hannah, Leslie, 2011. "Extreme Divorce: the Managerial Revolution in UK Companies before 1914," Cardiff Economics Working Papers E2011/21, Cardiff University, Cardiff Business School, Economics Section.
    4. repec:ers:journl:v:xx:y:2017:i:2a:p:538-567 is not listed on IDEAS
    5. Sun, Bo, 2014. "Executive compensation and earnings management under moral hazard," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 276-290.

    More about this item

    Keywords

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

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913

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