Is Say on Pay Value-Enhancing?: A Cross-Country Analysis

Abstract

There is a global movement to give shareholders a greater role in the corporate process. Say on Pay, which gives shareholders the right to vote on executive compensation is one of the tools of increased corporate democracy. Prior studies have been conducted to analyze Say on Pay on the U.K. and U.S., but this is the first study to analyze Say on Pay in a cross-country context. Analyses are conducted within a single country environment and within various groups (legislated vs. shareholder-initiated votes, binding vs. non-binding legislation, common law vs. civil law systems, and widely-held vs. concentrated ownership). I find that stocks of firms with positive abnormal CEO compensation and low CEO pay for performance react in a significant, positive manner. Significant positive abnormal returns are also earned by firms more likely to implement changes under shareholder pressure. For firms that receive shareholder-initiated Say on Pay proposals, I find that the stock price of these firms reacts negatively when the proposals are announced and when the proposal is passed. Overall, the findings suggest that the market views Say on Pay as value-enhancing for the companies with inefficient executive compensation and relatively poor corporate governance but value-destroying for other companies.