Three Essays on Executive Compensation - KOPS - Universität ...

Executive Compensation and Firm Performance in Germany
(1999), Haid and Yurtoglu (2006) and Rapp and Wolff (2010)).
Similar to Bertrand and Mullainathan (2000), we collect ownership data for one
sample year (2009) and divide the firms in our sample into two groups; firms with
a strong owner and firms without a strong owner. 37
In different specifications, we
define a strong owner as a shareholder who holds at least 25 or 50 percent of the
voting rights. 38
We exclude a firm from the strong owner group when the CEO is
the shareholder with the 25 (50) percent ownership stake.
We first investigate the impact of a strong owner on executive compensation
levels. It is straightforward to test for this effect with a dummy variable which is
one for firms with a strong owner and zero else. We use industry fixed effects in this
regression, because firm or executive fixed effects would absorb this dummy variable.
Columns 1 and 2 of Table 1.9 show the results for strong owners with a share of at
least 25 and 50 percent, respectively. The dummy for a strong owner is negative
and significant in both regressions, indicating that strong owners grant lower total
executive compensation. 39 In addition, the coefficient in the regression with 50
percent owners is larger (in absolute terms) which implies that stronger owners use
their position to decrease executive compensation. As an additional test we include
the free float of a stock in our regression. We define the free float as the fraction
of shares held by shareholders who own less than 5 percent of the outstanding
shares. 40
This measure controls not only for the presence of a large owner, but for
the aggregated fraction of outstanding shares not owned by shareholders holding
5 percent or more. Column 3 of Table 1.9 shows that the larger the free float
the higher is the level of executive compensation.
This implies once more that
more concentrated ownership is related to lower executive compensation. Hence,
as documented in previous studies on German executive compensation, we find a
negative effect of ownership concentration on executive compensation levels in the
three specifications of Table 1.9. This is support for Hypothesis 3.
Moreover, Bertrand and Mullainathan (2000) find that for U.S. data the negative
37 For a subsample of firms we checked the variation in ownership over time and found that
ownership concentration was fairly stable over the 5-year sample period. Therefore we decided to
follow Bertrand and Mullainathan (2000) and collected ownership data for one year to construct
the two subsamples.
38 Owners holding at least 25 percent of the voting rights can block major decisions at the annual
meeting. Separating our sample according to strong ownership defined as five percent or more is
inappropriate because only 10 firms in our sample are not controlled by a strong owner according
to this definition.
39 We find this effect also for the components of total compensation.
40 This is the definition of free float used by the Frankfurt Stock Exchange.
32