Institutional investors and executive compensation

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,. We further find a significantly positive relation between the pay-for-performance sensitivity of executive compensation and the concentration of institutional ownership, particularly when those institutions are less pressure-sensitive. These results suggest that the institutions serve a monitoring role in mitigating the agency problem between shareholders and managers.