Firm Expansion and CEO Pay

33 Pages Posted: 6 Apr 2006 Last revised: 25 Jun 2010

See all articles by Lucian A. Bebchuk

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; European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2005

Abstract

We study the extent to which decisions to expand firm size are associated with increases in subsequent CEO compensation. Controlling for past stock performance, we find a positive correlation between CEO compensation and the CEO's past decisions to increase firm size. This correlation is economically meaningful; for example, other things being equal, CEOs who in the preceding three years were in the top quartile in terms of expanding by increasing the number of shares outstanding receive compensation that is higher by one-third than the compensation of CEOs belonging to the bottom quartile. We also find that stock returns are correlated with subsequent CEO pay only to the extent that they contribute to expanding firm size; only the component of past stock returns not distributed as dividends is correlated with subsequent CEO pay. Finally, we find an asymmetry between increases and decreases in size: while increases in firm size are followed by higher CEO pay, decreases in firm size are not followed by reduction in such pay. The association we find between CEOs' compensation and firm-expanding decisions undertaken earlier during their service could provide CEOs with incentives to expand firm size.

Suggested Citation

Bebchuk, Lucian A. and Grinstein, Yaniv, Firm Expansion and CEO Pay (December 2005). NBER Working Paper No. w11886. Available at SSRN: https://ssrn.com/abstract=875737

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

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

National Bureau of Economic Research (NBER) ( email )

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

Yaniv Grinstein

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

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United States
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Interdisciplinary Center (IDC) Herzliyah ( email )

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Israel

European Corporate Governance Institute (ECGI)

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Belgium

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