Takeovers and (Excess) CEO Compensation

CentER Discussion Paper Series No. 2017-039

43 Pages Posted: 22 Sep 2017

See all articles by Isabel Feito-Ruiz

Isabel Feito-Ruiz

University of Leon

Luc Renneboog

Tilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)

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Date Written: September 21, 2017


We study if a CEO’s equity-based compensation affects the expected value generation in takeovers. When the objectives of management and shareholders are more aligned, as proxied by the use of equity-based compensation, more value-maximizing acquisitions are expected. Whereas in widely-held firms the decision power is with the management, in firms with concentrated ownership the decision power may be with major blockholders. This may entail that ownership concentration and equity-based pay are substitutes. We find a strongly positive relation between equity-based compensation and cumulative abnormal announcement returns at take-overs, but this relation is eroded when dominant share blocks are held by corporations, which confirms the substitution effect. Powerful CEOs in companies with weak boards and without actively monitoring shareholders may set their own pay which could lead to excesses. We relate excess pay to how takeover decisions are received by the market, and demonstrate that excess compensation negatively affects the acquirer’s stock valuation at a takeover announcement. The market is thus able to identify firms with agency problems and is cautious in its expectations about potential value creation by means of acquisitions.

Keywords: Equity-Based Compensation, Mergers and Acquisitions (M&As), Takeover, Shareholder Protection, Ownership Concentration

JEL Classification: G30, G32, G34, F30

Suggested Citation

Feito-Ruiz, Isabel and Renneboog, Luc, Takeovers and (Excess) CEO Compensation (September 21, 2017). CentER Discussion Paper Series No. 2017-039. Available at SSRN: https://ssrn.com/abstract=3040571 or http://dx.doi.org/10.2139/ssrn.3040571

Isabel Feito-Ruiz (Contact Author)

University of Leon ( email )

Leon, 24071
00349872934900 (Phone)
0034987291740 (Fax)

Luc Renneboog

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Warandelaan 2
5000 LE Tilburg
+13 31 466 8210 (Phone)
+13 31 466 2875 (Fax)

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE

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