Are shareholders stupid? On the surprising impact of binding say-on-pay on stock prices

This paper is the rst to empirically analyze the value to shareholders of the power to havea binding vote on management pay. We nd that in response to an unanticipated eventthat made it likely that an annual binding vote would become compulsory for Swiss publiccompanies, the apparent immediate beneciaries of such a power shift { the shareholders {reacted strongly negatively on average: The stock prices of more than two thirds of publiccompanies fell abnormally. We investigate two reasons for this surprising reaction. First,while there are alignment benets of binding say-on-pay, it interferes with eciently managedcompanies. Consistent with this idea, rms that have performed well and those thatpay their CEOs at market levels experienced particularly sharp share price drops. Second,shareholders may worry that CEOs anticipate that any extra-contractual human capital investmentsthey make in the rm are unlikely to be rewarded in full when shareholders voteon compensation in the next annual meeting. CEOs would, therefore, distort their specicinvestments, decreasing rm value today. Consistent with this idea, for example, rms withyounger CEOs saw steeper valuation declines.