Superstars or Superlemons? Top Executive Pay and Corporate Acquisitions
49 Pages Posted: 5 Mar 2007
Date Written: October 2006
Why are top executives of U.S. corporations paid so much? This paper evaluates empirically the merit of the two main existing answers to this question: 1) because of their talent; or 2) because of their power. To this end, I construct a simple measure of short-term excess pay of CEOs and other top executives, defined as the deviation of actual pay from the normal pay implied by firm, industry, and executive characteristics. I study the effect of excess pay on the profitability of corporate acquisitions and the related choice of financing method. I find that excess pay has a positive impact on shareholder value, in that acquirers who give excess rewards to their top executives experience significantly higher announcement-period abnormal stock returns than acquirers who do not. Moreover, excess pay decreases the likelihood that an acquisition is financed with equity. These results are strongly consistent with a model of executive pay based on talent rather than power.
Keywords: Executive Compensation, Acquirer Returns, Agency
JEL Classification: G30, G34
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