Executive Compensation and Incentives: The Impact of Takeover Legislation

Posted: 31 Dec 1998

See all articles by Sendhil Mullainathan

Sendhil Mullainathan

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Marianne Bertrand

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 1998

Abstract

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

Mullainathan, Sendhil and Bertrand, Marianne, Executive Compensation and Incentives: The Impact of Takeover Legislation (October 1998). MIT Department of Economics Working Paper No. 98-20. Available at SSRN: https://ssrn.com/abstract=141178

Sendhil Mullainathan (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
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National Bureau of Economic Research (NBER) ( email )

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Marianne Bertrand

University of Chicago - Booth School of Business ( email )

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HOME PAGE: http://gsbwww.uchicago.edu/fac/marianne.bertrand/vita/cv_0604.pdf

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR)

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