Executive Compensation and Incentives: the Impact of Takeover Legislation

39 Pages Posted: 13 Jan 1999 Last revised: 11 Oct 2010

See all articles by Marianne Bertrand

Marianne Bertrand

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

Sendhil Mullainathan

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

Multiple version iconThere are 2 versions of this paper

Date Written: December 1998

Abstract

We investigate the impact of changes in states' anti-takeover legislation on executive compensation. We find 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 model of CEO pay as well as with a skimming model in which reduced takeover fears allow CEO's 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 CEO's 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.

Suggested Citation

Bertrand, Marianne and Mullainathan, Sendhil, Executive Compensation and Incentives: the Impact of Takeover Legislation (December 1998). NBER Working Paper No. w6830. Available at SSRN: https://ssrn.com/abstract=141883

Marianne Bertrand (Contact Author)

University of Chicago - Booth School of Business ( email )

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Centre for Economic Policy Research (CEPR)

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Sendhil Mullainathan

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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