Critical Finance Review > Vol 3 > Issue 1

Institutional Investors and Executive Compensation Redux: A Comment on "Do Concentrated Institutional Investors Really Reduce Executive Compensation Whilst Raising Incentives"

Jay C. Hartzell, Department of Finance, McCombs School of Business, University of Texas at Austin, jay.hartzell@mccombs.utexas.edu Laura T. Starks, Department of Finance, McCombs School of Business, University of Texas at Austin, lstarks@mail.utexas.edu
 
Suggested Citation
Jay C. Hartzell and Laura T. Starks (2014), "Institutional Investors and Executive Compensation Redux: A Comment on "Do Concentrated Institutional Investors Really Reduce Executive Compensation Whilst Raising Incentives"", Critical Finance Review: Vol. 3: No. 1, pp 85-97. http://dx.doi.org/10.1561/104.00000017

Published: 09 Jan 2014
© 2013 J. C. Hartzell and L. T. Starks
 
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In this article:
1. Specification Issues Raised By Smith and Swan
2. Time Series Evidence on the Influence of Institutional Investors on Executive Compensation
3. Additional Analysis by Smith and Swan (2013)
4. Conclusion
References

Abstract

Smith and Swan (2013), referred to as SS, question the robustness of the results of Hartzell and Starks (2003), referred to as HS. We discuss the fact that they have to make two significant and unwarranted changes to our model specifications in order to remove the significance of the HS results. Simply logging firm size does not affect the significance of the relation between pay for performance and institutional investor concentration. In order to find an insignificant relation, SS also must develop a different and inferior measure of institutional investor concentration, and use that measure in conjunction with changes to the firm size controls. Thus, we maintain our original conclusion, as well as that of other researchers, that institutional investors both care about and have the ability to influence corporate governance, including executive compensation.

DOI:10.1561/104.00000017