Does the Relation between Executive Compensation and Firm Size Explain the Large Takeovers of the 1980s?

Posted: 26 Aug 1999

See all articles by Ajay Khorana

Ajay Khorana

Georgia Institute of Technology - Finance Area

Marc Zenner

Citigroup, Inc. - Investment Banking Division

Date Written: June 1994

Abstract

Jensen (1986), among others, suggests that executives may increase firm size beyond the optimum because executive compensation relates positively to firm size. We test this hypothesis by (i) analyzing changes in executive compensation around large acquisitions, and (ii) by comparing executive compensation of firms that undertake large acquisitions to a sample of industry and size matched (non-acquiring) firms. For firms undertaking large acquisitions we find an increase in cash compensation, but no increase in total compensation, in the post acquisition years. This result may be partially attributable to the presence of a positive "compensation-size" relation for the acquiror, but not for the control sample, in the pre- acquisition years. Overall, our results provide partial evidence that executive compensation considerations may have induced managers to undertake large acquisitions in the 1980s.

JEL Classification: G34

Suggested Citation

Khorana, Ajay and Zenner, Marc, Does the Relation between Executive Compensation and Firm Size Explain the Large Takeovers of the 1980s? (June 1994 ). Available at SSRN: https://ssrn.com/abstract=5403

Ajay Khorana

Georgia Institute of Technology - Finance Area ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-5110 (Phone)
404-894-6030 (Fax)

Marc Zenner (Contact Author)

Citigroup, Inc. - Investment Banking Division ( email )

Salomon Smith Barney
388 Greenwich St., 24th Flr
New York, NY 10013
United States

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