Decoupling CEO Wealth and Firm Performance: The Case of Acquiring CEOS
50 Pages Posted: 17 Mar 2005
Date Written: November 2, 2005
Abstract
We explore whether compensation policies in bidding firms counter or exacerbate agency conflicts by examining CEO pay and incentives around corporate takeovers. We find that even in mergers where bidding shareholders are worse off, bidding CEOs are better off three quarters of the time. In fact, the CEO's pay and his overall wealth become insensitive to negative stock performance, but his wealth rises in step with positive stock performance. Corporate governance matters; bidding firms with stronger boards retain the sensitivity of their CEOs' compensation to poor performance following the acquisition. In comparison, we find that CEOs are not rewarded for undertaking major capital expenditures. Our evidence is inconsistent with the incentive alignment hypothesis in corporate acquisitions.
Keywords: acquisitions, capital expenditures, corporate governance, equity incentives, pay-performance sensitivity
JEL Classification: G34
Suggested Citation: Suggested Citation
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