Kelly R. Brunarski

Variation in the Monitoring Incentives of Outside Stockholders

We examine abnormal returns around the announcement of antitakeover amendment proposals for evidence on variation in the effectiveness of monitoring by outside stockholders. The evidence suggests that the market views large stockholders who are outsiders but have potential business ties to a firm (affiliated blockholders) as less effective monitors than other outside blockholders (unaffiliated blockholders). Abnormal returns tend to be lower at firms where holdings of affiliated blockholders exceed holdings of unaffiliated blockholders than at firms where the reverse is true. The difference in the stock ownership of these two classes of blockholders explains more of the variation in abnormal returns than factors such as management stock ownership and board composition. The evidence for affiliated and unaffiliated blockholders is consistent when we focus on the relation between abnormal returns and institutional ownership. No evidence is found of systematic variation in the effectiveness of monitoring by institutional stockholders who are not blockholders.

The Importance of Board Quality in the Event of a CEO Death

We examine board quality and executive replacement decisions around deaths of senior executives. Stock price reactions to executive deaths are positively related to board independence. Controlling for such factors as the deceaseds stockholdings, outside blockholdings, board size, and whether the deceased was a founder, board independence is the most significant factor explaining abnormal returns. Board independence is particularly important when there is no apparent successor and firm performance is poor. The results are consistent with independent boards being reluctant to discipline poorly performing incumbent managers, but nevertheless using the opportunity of an executive death to improve the quality of management.

Do Directors Suffer External Consequences for Failing to Align Executive Pay Practices with Shareholder Preferences? Evidence from Say-on-Pay Votes

We provide the first evidence of external labor market penalties when directors fail to align with shareholder preferences for monitoring executive compensation. When shareholders express disapproval through low Say-On-Pay (SOP) support, directors incur significant external penalties, including lost board seats and compensation committee positions, decreased shareholder support for reelection, and decreased directorial compensation. Shareholders at firms sharing an affected director react negatively to the low support and increase their scrutiny of their firms’ pay practices. Our findings suggest that non-binding SOP votes may provide shareholders with a mechanism to influence director incentives, and therefore, executive compensation.

Do Directors Suffer External Consequences for Poor Oversight of Executive Compensation? Evidence from Say-on-Pay Votes

We provide the first evidence of significant external labor market penalties when directors fail to properly oversee executive compensation. When shareholders express disapproval through low Say-On-Pay (SOP) support, equity values decrease at firms linked by a shared director (interlocking firms), directors lose external board seats and compensation committee positions, and external directorial compensation decreases. Additionally, shareholder scrutiny increases at interlocking firms: shareholders are more likely to select annual SOP voting and offer low subsequent SOP support. We also provide the first evidence that SOP votes provide shareholders with a valuable mechanism to influence director incentives, and therefore, executive compensation contracts.