The Economic Consequences of CEO Compensation Lawsuits

This paper studies shareholder derivative lawsuits related to CEO compensation. We document that compensation lawsuits are more likely to be filed against firms with higher CEO pay, especially in the presence of poor firm performance. Firms reduce the level of CEO compensation after lawsuits, which leads to CEO departures and declines in CEO effort provisions, and consequently, results in deteriorated firm performance. Interestingly, compensation lawsuits accompanied by low support in the preceding Say‐on‐Pay votes, which likely capture the quality of pay practices, are associated with even higher pay cuts, but do not harm firm performance or lead to departures of talented CEOs, supporting the idea that suboptimal pay and deteriorated performance after compensation lawsuits are driven by the lack of a sophisticated understanding of CEO pay by plaintiff shareholders.