Liability Protection, Director Compensation, and Incentives

38 Pages Posted: 6 Jul 2010 Last revised: 28 Nov 2012

Iness Aguir

University of Texas at San Antonio - Department of Finance

Natasha Burns

University of Texas at San Antonio - Department of Finance

Sattar Mansi

Virginia Tech

John K. Wald

University of Texas at San Antonio

Date Written: November 23, 2012

Abstract

We examine the effect of liability protection on the compensation of directors and on takeover outcomes. Consistent with the hypothesis that directors require additional compensation if they bear liability, we find that director compensation is higher for firms that provide less liability protection. Examining takeovers, we find evidence that takeovers of firms with protected directors are less likely to succeed. Moreover, firms with protected directors are more likely to accept a lower bid premium, and this finding is consistent with protected directors having reduced incentives to negotiate for the highest possible price during the acquisition. Overall, the results are consistent with the notion that director liability provisions have a significant impact both on director compensation and director duty.

Keywords: director liability, director compensation, takeovers

JEL Classification: G34, K22

Suggested Citation

Aguir, Iness and Burns, Natasha and Mansi, Sattar and Wald, John K., Liability Protection, Director Compensation, and Incentives (November 23, 2012). Journal of Financial Intermediation, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1635444 or http://dx.doi.org/10.2139/ssrn.1635444

Iness Aguir

University of Texas at San Antonio - Department of Finance ( email )

San Antonio, TX 78249
United States

Natasha Burns

University of Texas at San Antonio - Department of Finance ( email )

San Antonio, TX 78249
United States
210-458-6838 (Phone)

Sattar Mansi

Virginia Tech ( email )

John K. Wald (Contact Author)

University of Texas at San Antonio ( email )

1 UTSA Circle
San Antonio, TX 78249
United States
210-458-6324 (Phone)

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