Passive Institutions and Long-Run CEO Compensation : Evidence from Proxy Voting

I study the effect of passive institutional ownership on the horizon of CEO pay. A one-standard-deviation increase in passive ownership leads to a 0.46-standard-deviation increase in the compensation duration. I find evidence of proxy voting by passive investors as the channels through which passive investors affect incentive horizons. Passive ownership is associated with more shareholder-sponsored compensation proposals. Moreover, since the passage of the Dodd-Frank Act, passive funds tend to vote more against Say-on-Pay (SOP) proposals, and SOP (shareholder-sponsored compensation) proposals are less (more) likely to pass with higher passive ownership. Finally, passive ownership is associated with less real earnings management. Overall, these findings suggest that passive institutions work to lengthen the CEO compensation duration to mitigate managerial myopia