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The economic consequences of executive compensation disclosure: evidence from Germany

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dc.contributor Aalto University en
dc.contributor Aalto-yliopisto fi
dc.contributor.author Lofruthe, Hendrik
dc.date.accessioned 2011-11-25T08:51:46Z
dc.date.available 2011-11-25T08:51:46Z
dc.date.issued 2011
dc.identifier.uri https://aaltodoc.aalto.fi/handle/123456789/828
dc.description.abstract PURPOSE OF THE STUDY Executive compensation frequently makes headlines in both academic journals and the yellow press. From the academic point of view, executive compensation has its grounds in agency theory. Effective compensation schemes align the interests of managers and owners and motivate managers to maximize shareholder value. Disclosure of compensation schemes enables shareholders to evaluate the remuneration contracts’ adequacy. In 2005, the German legislator created a natural experiment to study the economic consequences of executive compensation disclosure. From 2006 on, firms were obliged to disclose individual compensation details for their executive board members. Prior to that, disclosure of individual figures was recommended but voluntary, disclosure was mandatory only for the board as a whole. The setting allows examining whether voluntary individual disclosure reveals information about the underlying firms, whether the capital markets appreciated the increased disclosure requirements and how firms reacted to the amendment. DATA AND METHODOLOGY The sample is collected from a repeated cross-section of the constituents of the German stock indexes DAX, MDAX, SDAX and TecDAX for the years 2005-2007. After exclusion of missing data, 428 out of 480 firm years (160 firms for three years) remain which represents a considerable portion of the total German market capitalization. Compensation data is hand collected from annual reports, other financial data is taken from the Thomson One Banker database. Hypotheses are tested by comparisons of means, random effects regressions, difference-in-differences analysis and an event study that uses constant mean return and mean adjusted return models. RESULTS The results show structural differences between voluntary disclosing and non-disclosing firms. Disclosing firms use performance-based compensation to a greater extent but pay comparatively more than their non-disclosing peers. Event study results indicate positive capital market reactions around the dates the amendment was introduced. The findings support the governance improvement hypothesis which predicts improvements of compensation schemes when disclosure is more detailed. Examination of the real firm reactions shows increases in absolute pay levels and the performance-based portions. Especially, firms increase compensation when they switch to individual disclosure. Possible reasons are higher competition for labor or compensation for the higher risk of variable payments. en
dc.format.extent 95
dc.format.mimetype application/pdf en
dc.language.iso en en
dc.title The economic consequences of executive compensation disclosure: evidence from Germany en
dc.type G2 Pro gradu, diplomityö fi
dc.contributor.school Kauppakorkeakoulu fi
dc.contributor.school School of Economics en
dc.contributor.department Department of Finance en
dc.contributor.department Rahoituksen laitos fi
dc.subject.keyword Compensation
dc.subject.keyword disclosure
dc.subject.keyword agency conflicts
dc.subject.keyword corporate governance
dc.subject.keyword market reactions
dc.identifier.urn URN:NBN:fi:aalto-201111291702
dc.type.dcmitype text en
dc.programme.major Finance en
dc.programme.major Rahoitus fi
dc.type.ontasot Master's thesis en
dc.type.ontasot Pro gradu tutkielma fi
dc.subject.helecon rahoitus
dc.subject.helecon financing
dc.subject.helecon kannustaminen
dc.subject.helecon incentives
dc.subject.helecon palkkiot
dc.subject.helecon remuneration
dc.subject.helecon johtajat
dc.subject.helecon managers
dc.subject.helecon corporate governance
dc.subject.helecon corporate governance
dc.subject.helecon Saksa
dc.subject.helecon Germany
dc.ethesisid 12658
dc.date.dateaccepted 2011-11-01
dc.location P1 I
local.aalto.openaccess yes
local.aalto.idthes 12658

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