The Impacts of Firm Expansions on the CEO Wealth: A Look at CEO Incentives to Make Expansion Decisions
University of North Dakota
Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)
We investigate the impact of firm expansion decisions on CEO wealth and derive the ex ante wealth-driven incentives. We find that CEO incentives are determined by a combined influence of multiple factors, including board compensation policy, stock market mispricing, as well as CEO's own portfolio adjustment. We analyze these effects by decomposing CEO's new grants and existing portfolio, isolating CEO wealth gains and losses, and separating short-run and long-run effects. We further contribute to the literature by identifying the pay-for-size sensitivity as part of the board compensation policy, which is less recognized in the literature than the pay-for-performance sensitivity. We document CEO compensation in expansion firms is more sensitive to size increase than in non-expansion firms. This pay-for-size sensitivity provides an additional incentive for expansion. In addition to analyze the expansion firms on average, we compare the characteristics and CEO incentives in acquisition and internal growth firms.
Number of Pages in PDF File: 52
Keywords: mergers and acquisitions, corporate governance, managerial incentives, corporate investment, pay-for-size sensitivity
JEL Classification: G34, J33
Date posted: January 2, 2007
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