Do Concentrated Institutional Investors Really Reduce Executive Compensation Whilst Raising Incentives?

Hartzell and Starks (HS) (2003) report that firms with more concentrated institutional investors pay executives less, and make this pay more sensitive to performance. In an extended data set covering 1992 to 2010, we find that institutional concentration has no such effects when we control for firm size with a logarithmically transformed market-capitalization instead of HS's raw market-capitalization. This holds both in the long-run time-series and in the panel analysis. Firms that HS consider monitored do not seem to have better control of managerial compensation or performance than their unmonitored counterparts. Our results are, on the whole, inconsistent with any form of concentrated institutional monitoring.