Decoupling CEO Wealth and Firm Performance: The Case of Acquiring CEOS

50 Pages Posted: 17 Mar 2005

See all articles by Kai Li

Kai Li

University of British Columbia (UBC) - Sauder School of Business; Asian Bureau of Finance and Economic Research (ABFER); China Academy of Financial Research (CAFR); European Corporate Governance Institute (ECGI); Canadian Sustainable Finance Network (CSFN)

Jarrad Harford

University of Washington; European Corporate Governance Institute (ECGI)

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

Li, Kai and Harford, Jarrad, Decoupling CEO Wealth and Firm Performance: The Case of Acquiring CEOS (November 2, 2005). Sauder School of Business Working Paper, Available at SSRN: https://ssrn.com/abstract=686845 or http://dx.doi.org/10.2139/ssrn.686845

Kai Li (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

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Canadian Sustainable Finance Network (CSFN) ( email )

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Jarrad Harford

University of Washington ( email )

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