Do Shareholders Welcome Court Intervention in CEO Pay Matters?

Abstract

Critics of CEO compensation argue that it reflects rent extraction, not efficient contracting, favoring the CEO’s interests to the detriment of shareholders. One mechanism to rein in executive pay is through court litigation, yet little academic research has examined this. We analyze the market’s reaction to an unanticipated court ruling in a lawsuit against Citigroup claiming corporate waste with regard to CEO pay, providing insights on shareholders’ view of court intervention in cases of excess pay. We find that shareholders of firms with excess pay react negatively to the court ruling consistent with shareholders perceiving court intervention as net costly. We also find that shareholders of financial firms with weaker shareholders’ rights react positively, relative to shareholders of non-financial firms, suggesting that while court intervention in the pay setting process is generally perceived as undesirable, it might be better received in these firms that have been the subject of recent criticisms.