IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

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

  • Christian Bayer

    ()

    (IGIER – Università Commerciale Luigi Bocconi, Italy)

  • Carsten Burhop

    ()

    (Max Planck Institute for Research on Collective Goods)

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.coll.mpg.de/pdf_dat/2008_11online.pdf
Download Restriction: no

Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2008_11.

as
in new window

Length: 34 pages
Date of creation: Mar 2008
Date of revision:
Handle: RePEc:mpg:wpaper:2008_11
Contact details of provider: Postal:
Kurt-Schumacher-Str. 10 - D- 53113 Bonn

Phone: +49-(0)228 / 91416-0
Fax: +49-(0)228 / 91416-55
Web page: http://www.coll.mpg.de/
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Thompson, Steve & Sourafel Girma & Peter W Wright, 2003. "Corporate Governance Reforms and Executive Compensation Determination: Evidence from the UK," Royal Economic Society Annual Conference 2003 202, Royal Economic Society.
  2. Hart, Oliver, 1995. "Corporate Governance: Some Theory and Implications," Economic Journal, Royal Economic Society, vol. 105(430), pages 678-89, May.
  3. Kenichi Ueda & Gianni De Nicolo & Luc Laeven, 2006. "Corporate Governance Quality; Trends and Real Effects," IMF Working Papers 06/293, International Monetary Fund.
  4. Baskin, Jonathan Barron, 1988. "The Development of Corporate Financial Markets in Britain and the United States, 1600–1914: Overcoming Asymmetric Information," Business History Review, Cambridge University Press, vol. 62(02), pages 199-237, June.
  5. Goergen, M. & Manjon, M.C. & Renneboog, L.D.R., 2004. "Recent Developments in German Corporate Governance," Discussion Paper 2004-014, Tilburg University, Tilburg Law and Economic Center.
  6. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
  7. Paul A. Gompers & Joy L. Ishii & Andrew Metrick, 2001. "Corporate Governance and Equity Prices," NBER Working Papers 8449, National Bureau of Economic Research, Inc.
  8. Bittner, Thomas, 2005. "An event study of the Rhenish-Westphalian Coal Syndicate," European Review of Economic History, Cambridge University Press, vol. 9(03), pages 337-364, December.
  9. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
  10. Klapper, Leora F. & Love, Inessa, 2002. "Corporate governance, investor protection, and performance in emerging markets," Policy Research Working Paper Series 2818, The World Bank.
  11. Paul L. Joskow & Nancy L. Rose & Catherin D. Wolfram, 1994. "Political Constraints on Executive Compensation: Evidence from the Electric Utility Industry," NBER Working Papers 4980, National Bureau of Economic Research, Inc.
  12. Jensen, M.C. & Murphy, K.J., 1988. "Performance Pay And Top Management Incentives," Papers 88-04, Rochester, Business - Managerial Economics Research Center.
  13. Volker Grossmann, 2003. "Managerial Job Assignment and Imperfect Competition in Asymmetric Equilibrium," CESifo Working Paper Series 914, CESifo Group Munich.
  14. Durnev, Art & Kim, E. Han, 2004. "To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation," CEI Working Paper Series 2004-7, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  15. Jean Tirole, 2006. "The Theory of Corporate Finance," Post-Print hal-00173191, HAL.
  16. Doidge, Craig & Karolyi, G. Andrew & Stulz, Rene M., 2004. "Why Do Countries Matter So Much for Corporate Governance?," Working Paper Series 2004-16, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  17. Christian Bayer & Carsten Burhop, 2009. "If only I could sack you! Management turnover and performance in Great German Banks between 1874 and 1913," Applied Economics Letters, Taylor & Francis Journals, vol. 16(2), pages 141-145.
  18. Conyon, Martin J., 1997. "Corporate governance and executive compensation," International Journal of Industrial Organization, Elsevier, vol. 15(4), pages 493-509, July.
  19. Peters, Lon L., 1989. "Managing Competition in German Coal, 1893–1913," The Journal of Economic History, Cambridge University Press, vol. 49(02), pages 419-433, June.
  20. Andrei Shleifer & Robert W. Vishny, 1995. "A Survey of Corporate Governance," Harvard Institute of Economic Research Working Papers 1741, Harvard - Institute of Economic Research.
  21. Vicente Cuñat & Maria Guadalupe, 2005. "How does product market competition shape incentive contracts?," LSE Research Online Documents on Economics 19894, London School of Economics and Political Science, LSE Library.
  22. Edwards, Jeremy & Ogilvie, Sheilagh C., 1995. "Universal Banks and German Industrialization: A Reappraisal," CEPR Discussion Papers 1171, C.E.P.R. Discussion Papers.
  23. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
  24. Fohlin, Caroline, 1996. "Relationship Banking, Liquidity, and Investment in the German Industrialization," Working Papers 913, California Institute of Technology, Division of the Humanities and Social Sciences.
  25. Lazear, Edward P, 2000. "The Future of Personnel Economics," Economic Journal, Royal Economic Society, vol. 110(467), pages F611-39, November.
  26. Caroline Fohlin, 2005. "The History of Corporate Ownership and Control in Germany," NBER Chapters, in: A History of Corporate Governance around the World: Family Business Groups to Professional Managers, pages 223-282 National Bureau of Economic Research, Inc.
  27. Core, John E. & Holthausen, Robert W. & Larcker, David F., 1999. "Corporate governance, chief executive officer compensation, and firm performance," Journal of Financial Economics, Elsevier, vol. 51(3), pages 371-406, March.
  28. Caprio, Gerard & Laeven, Luc & Levine, Ross, 2007. "Governance and bank valuation," Journal of Financial Intermediation, Elsevier, vol. 16(4), pages 584-617, October.
  29. Tiroley, Jean, 2000. "Corporate Governance," CEI Working Paper Series 2000-1, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  30. Grandy, Christopher, 1989. "New Jersey Corporate Chartermongering, 1875–1929," The Journal of Economic History, Cambridge University Press, vol. 49(03), pages 677-692, September.
  31. George P. Baker & Brian J. Hall, 2004. "CEO Incentives and Firm Size," Journal of Labor Economics, University of Chicago Press, vol. 22(4), pages 767-798, October.
  32. Rajesh Aggarwal & Andrew A. Samwick, 1998. "The Other Side of the Tradeoff: The Impact of Risk on Executive Compensation," NBER Working Papers 6634, National Bureau of Economic Research, Inc.
  33. Jain, Neelam, 2006. "Debt, managerial compensation and learning," European Economic Review, Elsevier, vol. 50(2), pages 377-399, February.
  34. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-31, July.
  35. Elston, Julie Ann & Goldberg, Lawrence G., 2003. "Executive compensation and agency costs in Germany," Journal of Banking & Finance, Elsevier, vol. 27(7), pages 1391-1410, July.
  36. Carsten Burhop, 2004. "Executive Remuneration and Firm Performance: The Case of Large German Banks, 1854-1910," Business History, Taylor & Francis Journals, vol. 46(4), pages 525-543.
  37. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
  38. Fear, Jeffrey & Kobrak, Christopher, 2006. "Diverging Paths: Accounting for Corporate Governance in America and Germany," Business History Review, Cambridge University Press, vol. 80(01), pages 1-48, March.
  39. Brian J. Hall & Jeffrey B. Liebman, 1997. "Are CEOs Really Paid Like Bureaucrats?," NBER Working Papers 6213, National Bureau of Economic Research, Inc.
  40. Simon Johnson & Andrei Shleifer, 2004. "Privatization and Corporate Governance," NBER Chapters, in: Governance, Regulation, and Privatization in the Asia-Pacific Region, NBER East Asia Seminar on Economics, Volume 12, pages 13-34 National Bureau of Economic Research, Inc.
  41. John E. Core & Wayne R. Guay & David F. Larcker, 2003. "Executive equity compensation and incentives: a survey," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 27-50.
  42. Kraft, Kornelius & Niederprum, Antonia, 1999. "Determinants of management compensation with risk-averse agents and dispersed ownership of the firm," Journal of Economic Behavior & Organization, Elsevier, vol. 40(1), pages 17-27, September.
  43. Conyon, Martin J & Murphy, Kevin J, 2000. "The Prince and the Pauper? CEO Pay in the United States and United Kingdom," Economic Journal, Royal Economic Society, vol. 110(467), pages F640-71, November.
  44. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  45. Garen, John E, 1994. "Executive Compensation and Principal-Agent Theory," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1175-99, December.
  46. John E. Core & Wayne R. Guay & Tjomme O. Rusticus, 2006. "Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors' Expectations," Journal of Finance, American Finance Association, vol. 61(2), pages 655-687, 04.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:mpg:wpaper:2008_11. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marc Martin)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.