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Executive Compensation and Incentives: The Impact of Takeover Legislation

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  • Marianne Bertrand
  • Sendhil Mullainathan

Abstract

We investigate the impact of changes in states' anti-takeover legislation on executive compensation. We find 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 CEO's 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 CEO's 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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6830.

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Date of creation: Dec 1998
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Handle: RePEc:nbr:nberwo:6830

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  1. Gibbons, Robert & Murphy, Kevin J, 1992. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(3), pages 468-505, June.
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  4. Murphy, Kevin J., 1985. "Corporate performance and managerial remuneration : An empirical analysis," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 7(1-3), pages 11-42, April.
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  9. Karpoff, Jonathan M. & Malatesta, Paul H., 1989. "The wealth effects of second-generation state takeover legislation," Journal of Financial Economics, Elsevier, Elsevier, vol. 25(2), pages 291-322, December.
  10. Pound, John, 1987. "The Effects of Antitakeover Amendments on Takeover Activity: Some Direct Evidence," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 30(2), pages 353-67, October.
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  12. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, American Economic Association, vol. 84(3), pages 622-41, June.
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  14. Anup Agrawal & Charles R. Knoeber, . "Managerial Compensation and the Threat of Takeover (Revision of 9-96)," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 06-97, Wharton School Rodney L. White Center for Financial Research.
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