Shareholder Patience: Implications for Executive Compensation and Firm Performance

Abstract

Purpose: This paper explores how shareholder patience can influence firm performance and the efficacy of executive compensation and corporate governance in organizations. The shareholders’ patience, as reflected in their tendency to hold stock for extended periods, enables firm management to make long-term decisions and sustain ongoing project stability, which reflects positively on firm value. Shareholder patience amplifies the positive effects of un-exercisable options on a firm’s long-term performance and restrains overconfident CEOs by improving governance rather than by relying on market reactions, which positively influences performance.
Study design/methodology/approach: The quantitative analysis conducted in this paper utilizes a fixed-effects regression model.
Sample and data: This paper utilizes a multi-industry sample of 1,397 publicly traded U.S. firms that operated between 1999 and 2016. The data were retrieved from various archival sources.
Results: Shareholders’ patience was positively associated with a firm’s performance, both in the short term and the long term. Further, the shareholders’ patience accentuated the positive effects of TMT un-exercisable stock options on the firm’s long-term performance but did not influence the negative effects of TMT exercisable stock options on the firm’s performance. Shareholder patience weakened the negative effects of CEO overconfidence on firm performance.
Originality/value: This paper provides evidence of the effects of shareholders’ patience on the efficacy of executive compensation, which reflects positively on a firm’s performance.
Research limitations/implications: The findings presented in this paper have limitations in terms of generalizability to non-U.S. firms and private and entrepreneurial firms.