New Active Blockholders and Adjustment of CEO relative incentive ratios

Abstract

We study the emergence of blockholders as an important mechanism that corrects deviations from target CEO relative debt-to-equity incentive ratios. We find that a new active blockholder more likely emerges when a firm deviates from target; deviations fall during the period the blockholder owns shares; and deviations fall more when the blockholder appoints a director to the firm. When a firm is above (below) target, blockholders are associated with less (more) inside debt and more (no change in) inside equity, implying there is no “one-size-fits-all” compensation change for blockholders. Outside debt and equity increase for both above and below target firms.