Institutional Investors and Executive Compensation
July 2000
Jay C. Hartzell, and Laura T. Starks
ABSTRACT
Due to institutional investors' increasing ownership and interest in corporate governance, we hypothesize that
the presence of institutional investors is associated with certain executive compensation structures. We find a
significantly negative relation between the level of compensation and the concentration of institutional ownership,
suggesting that institutions serve a monitoring role in the shareholder-manager agency problem. We further find
a significantly positive relation between the pay-for-performance sensitivity of executive compensation and both
the level and concentration of institutional ownership. These results suggest that the institutions act as a complement
rather than a substitute to incentive compensation in mitigating the agency problem.
Subject:Corporate Finance/Corporate Governance
Classification: Empirical
Jay Hartzell
Institution: Stern School of Business, New York University
Email: jhartzel@stern.nyu.edu
Phone: (212) 998-0359
Home Page: http://www.stern.nyu.edu/~jhartzel/
Laura T. Starks
Institution: Department of Finance, University of Texas
Email: lstarks@mail.utexas.edu
Phone: (512) 471-5899
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