Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/26948 
Year of Publication: 
2008
Series/Report no.: 
Preprints of the Max Planck Institute for Research on Collective Goods No. 2008,11
Publisher: 
Max Planck Institute for Research on Collective Goods, Bonn
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.
Subjects: 
pay-performance sensitivity
natural experiment
legal reform, corporate governance
JEL: 
G30
J33
N23
Document Type: 
Working Paper

Files in This Item:
File
Size
328.81 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.