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Review of Finance Advance Access originally published online on May 8, 2008
Review of Finance 2009 13(1):81-113; doi:10.1093/rof/rfn011
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© The Author 2008. Published by Oxford University Press on behalf of the European Finance Association. All right reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Shareholder Rights, Boards, and CEO Compensation*

Rüdiger Fahlenbrach

The Ohio State University, Fisher College of Business

I analyze the role of executive compensation in corporate governance. As proxies for corporate governance, I use board size, board independence, CEO-chair duality, institutional ownership concentration, CEO tenure, and an index of shareholder rights. The results from a broad cross-section of large U.S. public firms are inconsistent with recent claims that entrenched managers design their own compensation contracts. The interactions of the corporate governance mechanisms with total pay-for-performance and excess compensation can be explained by governance substitution. If a firm has generally weaker governance, the compensation contract helps better align the interests of shareholders and the CEO.

JEL Classification: G32, G34, J33

* I would like to especially thank two anonymous referees, Sabri Boubaker, John Core, David Denis, Simon Gervais, Paul Gompers, Jay Hartzell, Craig MacKinlay, Leonardo Madureira, Andrew Metrick, Bernadette Minton, Marco Pagano (the editor), Juliette Parnet, Krishna Ramaswamy, Patrik Sandås, Rob Stambaugh, Günter Strobl, René Stulz, Narayanan Subramaniam, Shane Underwood, Janice Willett, Karen Wruck, and participants at the Midwest Finance AssociatioDn meeting, the Financial Management Association meeting, and a Wharton lunch seminar for helpful comments and suggestions. Financial support from NSF grant SES-0136791, from a Wharton research grant, and from the Charles A. Dice Center for Research in Financial Economics is gratefully acknowledged.


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