Disciplinary shocks: say-on-pay and the role of large shareholders

We examine the determinants and impact of Say-on-Pay (SoP) votes that are mandated by the Dodd-Frank Act. We confirm that vote outcomes are positively related to recent firm performance, and negatively related to CEO compensation in the prior year. We document that greater equity ownership by institutions and outside block holders heightens the vote sensitivities to firm performance and CEO compensation. Our estimates indicate that, despite their non-binding nature, SoP votes are an effective device in monitoring management. SoP vote outcomes have material effects. Firms with adverse voting outcomes exhibit stronger stock and accounting performance in the year following the vote, and are associated with smaller CEO compensation increments. Finally, we find that the increments to cash holding are negatively related, while long-term assets are positively related to SoP vote outcomes. These findings are indicative of a disciplinary shock. Our findings suggest that Say-on-Pay should survive the current efforts to repeal various aspects of Dodd-Frank.