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A Corporate Governance Reform as a Natural Experiment for Incentive Contracts

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  • Christian Bayer

    (University of Dortmund)

  • Carsten Burhop

    (University of Münster)

Abstract

The present paper proposes to employ a major shift in the legal and institutional environment to identify contractual incentives from the correlation of executive pay and firm performance. We use the reform of the German stock companies act in 1884 as such a major shift and estimate the sensitivity of the pay to firm 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 to decrease significantly after the reform. While executives received a bonus of 39 M per 1000 M increase in profits before 1884, after the reform the sensitivity decreased by two-thirds.

Suggested Citation

  • Christian Bayer & Carsten Burhop, 2004. "A Corporate Governance Reform as a Natural Experiment for Incentive Contracts," Finance 0407002, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:0407002 Note: Type of Document - pdf; pages: 23
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    References listed on IDEAS

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    Cited by:

    1. Christian Bayer & Carsten Burhop, 2005. "If only I could sack you! Management turnover and performance in large German Banks between 1874 and 1913," Economic History 0502006, EconWPA.

    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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