Public pension boards fear inciting stakeholder outrage if they compensate internal investment managers with market-level salaries. We derive theoretical implications in an agency-portfolio-choice model motivated by inequality aversion. In a global sample, relaxing the effect of outrage on contracting leads to an average annual incremental value-Added of $49 million generated through 11 bps in higher excess returns from risky assets, at the cost of $302,429 in additional compensation. Governance reforms that address outrage by reducing political appointees or requiring independent skills-based boards can increase the annual value-Added. These findings are orthogonal to costly political distortions from underfunding and pay-To-play schemes. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
|Number of pages
|Review of Financial Studies
|Published - Jun 1 2022
Bibliographical notePublisher Copyright:
© 2021 The Authors 2021. Published by Oxford University Press.
ASJC Scopus subject areas
- Economics and Econometrics