The effect of minority veto rights on controller pay tunneling

Jesse M. Fried, Ehud Kamar, Yishay Yafeh

Research output: Contribution to journalArticlepeer-review

Abstract

A central challenge in the regulation of controlled firms is curbing rent extraction by controllers. As independent directors and fiduciary duties are often insufficient, some jurisdictions give minority shareholders veto rights over related-party transactions. To assess these rights’ effectiveness, we exploit a 2011 Israeli reform that gave minority shareholders veto rights over related-party transactions, including the pay of controllers and their relatives (“controller executives”). We find that the reform curbed controller-executive pay and led some controller executives to resign or go with little or no pay in circumstances suggesting their pay would be rejected. These findings suggest that minority veto rights can be an effective corporate governance tool.

Original languageEnglish
Pages (from-to)777-788
Number of pages12
JournalJournal of Financial Economics
Volume138
Issue number3
DOIs
StatePublished - Dec 2020

Keywords

  • Controlling shareholders
  • Executive compensation
  • Related-party transactions
  • Shareholder voting
  • Tunneling

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