The Market for Corporate Control and CEO Compensation: Complements or Substitutes?
Posted: 6 May 2009
Date Written: May 5, 2009
We study the relation between firms’ internal governance mechanisms and the market for corporate control by examining how CEO compensation changed following the enactment of anti-takeover laws by various states in the 1980s. We find that CEOs are paid more after controlling for performance and their compensation is more sensitive to performance (both stock returns and accounting return-on-assets) following the enactment of these laws. We also find that the increased sensitivity to performance is attributable only to the “good luck” components of stock returns and accounting return-on-assets (defined as the positive components of performance attributed to market and industry factors). We interpret these findings as consistent with the view that the market for corporate control and CEO compensation are complementary governance mechanisms.
Keywords: Anti-takeover laws, CEO compensation, Performance-based Incentives, Corporate governance
JEL Classification: J33, G12, G24, G34, G38, M41
Suggested Citation: Suggested Citation