Superstars or Superlemons? Top Executive Pay and Corporate Acquisitions

49 Pages Posted: 5 Mar 2007

See all articles by Antonio Falato

Antonio Falato

Board of Governors of the Federal Reserve System

Date Written: October 2006

Abstract

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

Suggested Citation

Falato, Antonio, Superstars or Superlemons? Top Executive Pay and Corporate Acquisitions (October 2006). AFA 2008 New Orleans Meetings Paper; EFA 2008 Athens Meetings Paper. Available at SSRN: https://ssrn.com/abstract=968152 or http://dx.doi.org/10.2139/ssrn.968152

Antonio Falato (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th & C. St., N.W.
Washington, DC 20551
United States

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