Abstract
We investigate monitoring of CEO incentives and pay levels by institutional investors. Consistent with the microstructural monitoring equilibrium of Noe (2002), we show that option-grant pay-performance sensitivity is positively related to institutional trading intensity. Trading intensity also raises CEO pay. This is to be expected with preservation of reservation CEO utility levels. Institutions with the smallest holdings and highest portfolio turnover rates have the largest positive effects on compensation levels. This is also consistent with Noe's equilibrium. Our OLS results are robust to firm random and fixed firm effects and potential endogeneity problems.
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