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Firm Expansion and CEO Pay

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

Lucian A. Bebchuk

Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Yaniv Grinstein

Cornell University - Samuel Curtis Johnson Graduate School of Management; Interdisciplinary Center (IDC) Herzliyah

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Abstract

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, 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

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)

HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Yaniv Grinstein

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

Sage Hall
Ithaca, NY 14853
United States
607-255-8686 (Phone)
607-254-4590 (Fax)

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

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