Do Voting Rights Matter?: Evidence from the Adoption of Equity-Based Compensation Plans

45 Pages Posted: 31 Oct 2003

See all articles by Sudhakar V. Balachandran

Sudhakar V. Balachandran

University of Illinois at Chicago

Peter R. Joos

INSEAD

Joseph Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: October 2003

Abstract

Recent corporate scandals and subsequent regulatory actions have heightened both the academic communities and the public's interest in corporate governance issues. Academics have long argued that voting rights constitute a critical component of a system of corporate governance. We provide evidence on the importance of one aspect of the firm's corporate governance system, namely shareholders' voting rights, by examining the determinants of the decision to grant equity-based compensation to the employees of the firm with or without shareholder approval. We find that poorly-performing firms and poorly-governed firms are more likely to adopt equity-based compensation plans without shareholder approval. Furthermore, when we examine financial performance subsequent to adoption of equity-based compensation plans, we find that poorly-governed firms that adopt equity-based compensation plans without consulting shareholder do not appear to gain any significant benefits associated with the incentives the plans are supposed to provide. In fact, in the year after an equity-based compensation plan is adopted, these firms perform worse than firms that have good systems of corporate governance or firms that place equity-based compensation plans to a shareholder vote. Overall, our results suggest that shareholder voting rights are an important tool of corporate governance.

Keywords: voting rights, corporate governance, regulation, SEC, transparency, accounting, agency theory, stock options, equity based compensation, incomplete contracts, governance

JEL Classification: G34, J33, D82, M41

Suggested Citation

Balachandran, Sudhakar V. and Joos, Peter R. and Weber, Joseph Peter, Do Voting Rights Matter?: Evidence from the Adoption of Equity-Based Compensation Plans (October 2003). Available at SSRN: https://ssrn.com/abstract=461300 or http://dx.doi.org/10.2139/ssrn.461300

Sudhakar V. Balachandran

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

Peter R. Joos

INSEAD ( email )

1 Ayer Rajah Avenue
Singapore, 138676
Singapore

Joseph Peter Weber (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
617-253-4310 (Phone)

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