Executive Compensation and Incentives: The Impact of Takeover Legislation
Posted: 31 Dec 1998
Date Written: October 1998
We investigate the impact of changes in states' anti-takeover legislation on executive compensation. We find that 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 allow CEOs 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 CEOs' 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.
JEL Classification: D21, D80, G3, J41
Suggested Citation: Suggested Citation