Executive Compensation and Incentives: The Impact of Takeover Legislation

Author
Keywords
Abstract

We investigate the impact of changes in states’ anti-takeover legislation on executive compensation.
We find that both pay for performance sensitivities and mean pay increase for the firms affected by
the legislation (relative to a control group). These findings are partially consistent with an optimal
contracting model of CEO pay as well as with a skimming model in which reduced takeover fears
allow CEOs to skim more. We compute lower bounds on the relative risk aversion coefficients
implied by our findings. These lower bounds are relatively high, indicating that the increase in
mean pay may have been more than needed to maintain CEOs’ individual rationality constraints.
Under both models however, our evidence shows that the increased pay for performance offsets
some of the incentive reduction caused by lower takeover threats.

Year of Publication
1998
Number
404
Date Published
10/1998
Publication Language
eng
Citation Key
7931
URL
Working Papers