39 Pages Posted: 7 Nov 2005 Last revised: 10 May 2009
We study the extent to which decisions to expand firm size are associated with increases in subsequent CEO compensation. Investigating a broad universe of firm-expansion choices, we find, controlling for performance and firm characteristics, a positive and economically meaningful correlation between CEO compensation and the CEO's past decisions to increase firm size. We demonstrate that the identified correlation is not driven by large corporate acquisitions, and that it remains significant and economically meaningful when firms making large acquisitions during the relevant period are excluded. We further find an asymmetry between size increases and decreases: while size increases are positively correlated with subsequent CEO pay, size decreases are not negatively correlated with subsequent CEO pay. The identified association between expansion decisions and subsequent CEO pay is relevant for assessing CEO incentives with respect to a broad range of choices made by firms.
Keywords: executive compensation, firm size, acquisitions, distributions, repurchases, stock issuance, empire-building, sales growth, pay for performance, options
JEL Classification: D23, G32, G38, J33, J44, K22, M14
Suggested Citation: Suggested Citation
Bebchuk, Lucian A. and Grinstein, Yaniv, Firm Expansion and CEO Pay. Harvard Law and Economics Discussion Paper No. 533, 2005; Johnson School Research Paper No. 27-06. Available at SSRN: https://ssrn.com/abstract=838245 or http://dx.doi.org/10.2139/ssrn.838245
By Kevin Murphy