CEO Compensation Contagion: Evidence from an Exogenous Shock

55 Pages Posted: 12 Feb 2011 Last revised: 25 Apr 2014

Frederick L. Bereskin

University of Delaware

David C. Cicero

Harbert College of Business, Auburn University

Date Written: August 3, 2012

Abstract

We examine how Chief Executive Officer (CEO) compensation increased at a subset of firms in response to a governance shock that affected compensation levels at other firms in the economy. We first show that Delaware-incorporated firms with staggered boards and no outside blockholders increased CEO compensation following the mid-1990s Delaware legal cases that strengthened their ability to resist hostile takeovers. Consistent with the Gabaix and Landier (2008) contagion hypothesis, non-Delaware firms subsequently increased CEO compensation when the rulings affected a substantial number of firms in their industries. We further show how these legal developments contributed significantly to the rapid increase in CEO compensation in the late 1990s.

Keywords: Compensation, Delaware, Staggered Board, Poision Pill, Corporate Law, Contagion, Peer Group Analysis

JEL Classification: G30, G34

Suggested Citation

Bereskin, Frederick L. and Cicero, David C., CEO Compensation Contagion: Evidence from an Exogenous Shock (August 3, 2012). Journal of Financial Economics (JFE), Vol. 107, Issue 2. Available at SSRN: https://ssrn.com/abstract=1758860 or http://dx.doi.org/10.2139/ssrn.1758860

Frederick L. Bereskin

University of Delaware ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

David C. Cicero (Contact Author)

Harbert College of Business, Auburn University ( email )

415 Magnolia Ave.
Auburn, AL 36849
United States

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