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Liability Protection, Director Compensation, and IncentivesIness AguirUniversity of Texas at San Antonio - Department of Finance Natasha BurnsUniversity of Texas at San Antonio - Department of Finance Sattar MansiVirginia Polytechnic Institute & State University John K. WaldUniversity of Texas at San Antonio November 23, 2012 Journal of Financial Intermediation, Forthcoming Abstract: We examine the effect of liability protection on the compensation of directors and on takeover outcomes. Consistent with the hypothesis that directors require additional compensation if they bear liability, we find that director compensation is higher for firms that provide less liability protection. Examining takeovers, we find evidence that takeovers of firms with protected directors are less likely to succeed. Moreover, firms with protected directors are more likely to accept a lower bid premium, and this finding is consistent with protected directors having reduced incentives to negotiate for the highest possible price during the acquisition. Overall, the results are consistent with the notion that director liability provisions have a significant impact both on director compensation and director duty.
Number of Pages in PDF File: 38 Keywords: director liability, director compensation, takeovers JEL Classification: G34, K22 Accepted Paper SeriesDate posted: July 6, 2010 ; Last revised: November 28, 2012Suggested CitationContact Information
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