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Entrenchment and Severance Pay in Optimal Governance Structures

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Author Info

  • Andres Almazan

    (McCombs School of Business, University of Texas at Austin)

  • Javier Suarez

    (CEMFI, Madrid)

Abstract

This paper explores how motivating an incumbent CEO to undertake actions that improve the effectiveness of his management interacts with the firm's policy on CEO replacement. Such policy depends on the presence and the size of severance pay in the CEO's compensation package and on the CEO's influence on the board of directors regarding his own replacement (i.e., entrenchment). We explain when and why the combination of some degree of entrenchment and a sizeable severance package is desirable. The analysis offers predictions about the correlation between entrenchment, severance pay, and incentive compensation. Copyright (c) 2003 by the American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 58 (2003)
Issue (Month): 2 (04)
Pages: 519-548

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Handle: RePEc:bla:jfinan:v:58:y:2003:i:2:p:519-548

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