Institutional Investors, Managerial Ownership and Executive Compensationease

This paper extends the results of Hartzell and Starks (2003) by examining the relationship between executive compensation and the interaction between the monitoring role of institutional investors and managerial ownership. From the prior evidence, it is known that the concentrated institutional firm ownership provides a monitoring role and influence executive compensation. We find that concentrated institutional ownership is able to improve the pay for performance sensitivity and at the same time contain the level of managerial compensation for low managerial ownership firms. However, they are unable to provide such monitoring for firms with large managerial ownership. Our findings suggest that institutional investors are more effective monitors capable of influencing executive compensation when managerial power as measured by the managerial ownership is not high and thus lending support to the managerial power theory (Bebchuk, Fried and Walker, 2002; Finkelstein and Hambrick, 1989).