The Frequency of Say-on-Pay Vote, Shareholder Value, and Corporate Governance: Initial Evidence from the U.S. Firms

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Working Paper

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In this study, I examine (1) the market reaction to the shareholders’ decision on the frequency of the say-on-pay vote, and (2) the relation between such decision and firms’ existing corporate governance structures. When firms released the results of shareholders’ frequency vote in Form 8-K, I find that the market reaction was significantly positive for firms with excess CEO equity pay, and for firms whose shareholders preference of the frequency is the same as that recommended by the board. This positive market reaction is more profound at firms where shareholders “correct” the recommendations of the boards by demanding more frequent votes on the executive compensation practices. When examining the relation between shareholders’ frequency vote and corporate governance, I develop and test two hypotheses. The “substitute” hypothesis holds that shareholders at firms with less effective corporate governance are more likely to vote for an annual voting on the executive compensation programs. Under this hypothesis, the say-on-pay is used as a substitute to the existing monitoring mechanism of the executive compensation. In contrast, the “complement” hypothesis posits that shareholders prefer more frequent voting rights on executive compensation at firms where the current level of governance is considered to be effective. In this case, the say-on-pay is considered as a complement to the current level of monitoring of the executive compensation. The results in this paper indicate that, consistent with the “complement” hypothesis, shareholders opt for more frequent voting on the executive compensation at firms where the existing corporate governance structures are considered to be effective.


Accounting | Business Law, Public Responsibility, and Ethics | Corporate Finance

Research Areas

Corporate Reporting and Disclosure

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