Does Pay Activism Pay Off for Shareholders? : Shareholder Democracy and its Discontents

Dasgupta, Sudipto and Noe, Thomas (2019) Does Pay Activism Pay Off for Shareholders? : Shareholder Democracy and its Discontents. Management Science, 65 (4). pp. 1810-1832. ISSN 0025-1909

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Typically, shareholders are not sure whether boards act in their interest or have been captured by management. They are also less well informed than boards about firm investment opportunities and operating conditions. We develop a model, consistent with these observations, in which discretionary compensation payments to managers might increase firm value or might simply enrich managers at the expense of shareholders. After observing the board’s compensation and investment policies, shareholders use Bayes’s rule to update the probability that the board is captured. Shareholders are “outraged” if this updated probability is sufficiently large. Outrage is costly for the board. Shareholder democracy, by enabling outrage to constrain board actions, typically lowers firm value relative to either governance regimes that insulate boards from shareholder outrage or regimes that ban discretionary compensation altogether.

Item Type:
Journal Article
Journal or Publication Title:
Management Science
Additional Information:
Copyright © 2017, INFORMS
Uncontrolled Keywords:
?? governanceshareholder activismexecutive compensationdiscretionary paycharter amendmentsstrategy and managementmanagement science and operations research ??
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Deposited On:
06 Nov 2018 13:12
Last Modified:
25 Mar 2024 00:32