The Impacts of Firm Expansions on the CEO Wealth: A Look at CEO Incentives to Make Expansion Decisions

52 Pages Posted: 2 Jan 2007  

Yilei Zhang

University of North Carolina at Charlotte

Zhan Jiang

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Date Written: June 2007

Abstract

We investigate the impact of firm expansion decisions on CEO wealth and derive the ex ante wealth-driven incentives. We find that CEO incentives are determined by a combined influence of multiple factors, including board compensation policy, stock market mispricing, as well as CEO's own portfolio adjustment. We analyze these effects by decomposing CEO's new grants and existing portfolio, isolating CEO wealth gains and losses, and separating short-run and long-run effects. We further contribute to the literature by identifying the pay-for-size sensitivity as part of the board compensation policy, which is less recognized in the literature than the pay-for-performance sensitivity. We document CEO compensation in expansion firms is more sensitive to size increase than in non-expansion firms. This pay-for-size sensitivity provides an additional incentive for expansion. In addition to analyze the expansion firms on average, we compare the characteristics and CEO incentives in acquisition and internal growth firms.

Keywords: mergers and acquisitions, corporate governance, managerial incentives, corporate investment, pay-for-size sensitivity

JEL Classification: G34, J33

Suggested Citation

Zhang, Yilei and Jiang, Zhan, The Impacts of Firm Expansions on the CEO Wealth: A Look at CEO Incentives to Make Expansion Decisions (June 2007). Available at SSRN: https://ssrn.com/abstract=954159 or http://dx.doi.org/10.2139/ssrn.954159

Yilei Zhang (Contact Author)

University of North Carolina at Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

Zhan Jiang

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

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