Social Ties, CEO Compensation, and Mutual Fund Voting Patterns

1998 Words4 Pages

1 Introduction

Social connections between parties seem to matter for financial transactions. Cohen, Frazzini, and Malloy (2008) document that the trades made by mutual fund portfolio managers who invest in companies run by people with whom they have social ties (specifically, an overlap in educational background) outperform substantially the other trades made by the same portfolio managers in firms with which they have no social connections. In this paper we examine the effect of whether the type of social ties studied by Cohen, Frazzini, and Malloy (2008) appear also to be related to the executives’ compensation.

Institutional investors such as mutual funds can exert some control over corporate decisions and outcomes, including corporate compensation policies (e.g., Hartzell and Starks (2003)). We ask whether social connections between institutional investors and corporate officers influence how institutions exert that control, and whether top officers at firms that have stock ownership heavily held by socially connected mutual funds are compensated differently than their counterparts at less-connected firms. We find that total CEO compensation at “connected” firms (those with higher levels of socially connected ownership) is significantly higher than at less-connected counterparts. Using Execucomp data from 1992-2006 and hand-collected data on educational ties between firm executives and mutual fund managers, we show that for each percentage point of a firm’s ownership that is connected ownership, total executive compensation is 2.5% higher, controlling for other determinants of compensation. When computed at the mean compensation in our sample, a one standard deviation increase in connected ownership correlates with ...

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