Abstract
A central challenge in the regulation of controlled firms is curbing rent extraction by controllers. As independent directors and fiduciary duties are often insufficient, some jurisdictions give minority shareholders veto rights over related-party transactions. To assess these rights’ effectiveness, we exploit a 2011 Israeli reform that gave minority shareholders veto rights over related-party transactions, including the pay of controllers and their relatives (“controller executives”). We find that the reform curbed controller-executive pay and led some controller executives to resign or go with little or no pay in circumstances suggesting their pay would be rejected. These findings suggest that minority veto rights can be an effective corporate governance tool.
| Original language | American English |
|---|---|
| Pages (from-to) | 777-788 |
| Number of pages | 12 |
| Journal | Journal of Financial Economics |
| Volume | 138 |
| Issue number | 3 |
| DOIs | |
| State | Published - Dec 2020 |
Bibliographical note
Funding Information:This project received support from the Binational Science Foundation (Grant No. 2012/071) and the Raymond Ackerman Family Chair in Israeli Corporate Governance. Yafeh acknowledges financial support from the Krueger Center at the Jerusalem School of Business Administration. We thank Menachem Abudy, Benjamin Alarie, John Armour, Nikolaos Artavanis, Bernard Black, Stijn Claessens, Oded Cohen, Jean-Gabriel Cousin, Luca Enriques, Zohar Goshen, Yaniv Grinstein, Assaf Hamdani, Sharon Hannes, Naomi Hausman, Konstantin Kosenko, Beni Lauterbach, Jongsub Lee, Amir Licht, Yu-Hsin Lin, Randall Morck (the referee), Anthony Niblett, Konrad Raff, Edward Rock, Marco Ventoruzzo, and seminar participants at Bar Ilan University, Bocconi University, the University of Hamburg, the Hebrew University, the University of Lille, National Taiwan University, Oxford University, Seoul National University, Tel Aviv University, the University of Vienna, and the University of Zurich, as well as conference participants at the NYU/Tel Aviv University Corporate Law Conference, the University of Siena, the University of Toronto, the Tel Aviv University Law and Economics Workshop, the American Law and Economics Association 2018 Annual Meeting, the Rotterdam Executive Compensation 2018 Workshop, the Corporate Governance in Emerging Markets 2018 Workshop, the Empirical Legal Studies 2018 Conference, the Empirical Legal Studies in Europe 2018 Conference, and the Journal of Law, Finance and Accounting 2018 Conference for very helpful comments. Kobi Avramov of the Tel Aviv Stock Exchange kindly assisted us with data queries. We are also grateful to Shai Ashri, Aviad Balzam, Peleg Davidovitz, Dana Gorfine, David Harar, Nufar Kotler, Michal Lavi, Alon Luxemburg, Naama Mond, Oriya Peretz, Itamar Rahabi, Dorin Rottenshtreich, Barak Steinmetz, Hadas Studnik, Tomer Yafeh, and Nadav Yafit for outstanding research assistance.
Funding Information:
This project received support from the Binational Science Foundation (Grant No. 2012/071) and the Raymond Ackerman Family Chair in Israeli Corporate Governance. Yafeh acknowledges financial support from the Krueger Center at the Jerusalem School of Business Administration. We thank Menachem Abudy, Benjamin Alarie, John Armour, Nikolaos Artavanis, Bernard Black, Stijn Claessens, Oded Cohen, Jean-Gabriel Cousin, Luca Enriques, Zohar Goshen, Yaniv Grinstein, Assaf Hamdani, Sharon Hannes, Naomi Hausman, Konstantin Kosenko, Beni Lauterbach, Jongsub Lee, Amir Licht, Yu-Hsin Lin, Randall Morck (the referee), Anthony Niblett, Konrad Raff, Edward Rock, Marco Ventoruzzo, and seminar participants at Bar Ilan University, Bocconi University, the University of Hamburg, the Hebrew University, the University of Lille, National Taiwan University, Oxford University, Seoul National University, Tel Aviv University, the University of Vienna, and the University of Zurich, as well as conference participants at the NYU/Tel Aviv University Corporate Law Conference, the University of Siena, the University of Toronto, the Tel Aviv University Law and Economics Workshop, the American Law and Economics Association 2018 Annual Meeting, the Rotterdam Executive Compensation 2018 Workshop, the Corporate Governance in Emerging Markets 2018 Workshop, the Empirical Legal Studies 2018 Conference, the Empirical Legal Studies in Europe 2018 Conference, and the Journal of Law, Finance and Accounting 2018 Conference for very helpful comments. Kobi Avramov of the Tel Aviv Stock Exchange kindly assisted us with data queries. We are also grateful to Shai Ashri, Aviad Balzam, Peleg Davidovitz, Dana Gorfine, David Harar, Nufar Kotler, Michal Lavi, Alon Luxemburg, Naama Mond, Oriya Peretz, Itamar Rahabi, Dorin Rottenshtreich, Barak Steinmetz, Hadas Studnik, Tomer Yafeh, and Nadav Yafit for outstanding research assistance.
Publisher Copyright:
© 2020
Keywords
- Controlling shareholders
- Executive compensation
- Related-party transactions
- Shareholder voting
- Tunneling