Firm Expansion and CEO Pay

39 Pages Posted: 7 Nov 2005 Last revised: 10 May 2009

See all articles by Lucian A. Bebchuk

Lucian A. Bebchuk

Harvard Law School; European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Yaniv Grinstein

Reichman University - Interdisciplinary Center (IDC) Herzliyah; Cornell University - Samuel Curtis Johnson Graduate School of Management; European Corporate Governance Institute (ECGI)

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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

Bebchuk, Lucian A. and Grinstein, Yaniv 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: or

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

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National Bureau of Economic Research (NBER) ( email )

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Yaniv Grinstein

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

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Reichman University - Interdisciplinary Center (IDC) Herzliyah ( email )

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European Corporate Governance Institute (ECGI)

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