Decoupling CEO Wealth and Firm Performance: The Case of Acquiring CEOs

Kai Li, Jarrad Harford
2005 Social Science Research Network  
We explore whether compensation policies in bidding firms counter or exacerbate agency conflicts by examining CEO pay and incentives around corporate takeovers. We find that even in mergers where bidding shareholders are worse off, bidding CEOs are better off three quarters of the time. In fact, the CEO's pay and his overall wealth become insensitive to negative stock performance, but his wealth rises in step with positive stock performance. Corporate governance matters; bidding firms with
more » ... ing firms with stronger boards retain the sensitivity of their CEOs' compensation to poor performance following the acquisition. In comparison, we find that CEOs are not rewarded for undertaking major capital expenditures. Our evidence is inconsistent with the incentive alignment hypothesis in corporate acquisitions. * Harford is from University of Washington Business School, and Li is from Sauder School of Business, University of British Columbia. We thank the editor Rob Stambaugh, an associate editor, an anonymous referee
doi:10.2139/ssrn.686845 fatcat:lhhrgt6o3vfm5dxmeaz5kvj5gi