Abstract
We study whether changes in corporate governance and CEO power affect bonus-based implicit relative performance evaluation (RPE). We rely on a regression discontinuity design of shareholder proposals to proxy for shocks to CEO power. The effect of shareholder proposals on RPE is stronger under situations where shareholder proposals are expected to better capture changes in CEO power. We identify important real effects associated with the strengthening of RPE and find that idiosyncratic risk increases and co-movement decreases between firms and their peers in terms of changes in capital and inventory investment and changes in Tobin’s Q after a shareholder proposal is passed.
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