Paper Corporate Governance and Executive Pay: Evidence from Takeover Legislation
We examine the effects of anti-takeover legislation on CEO pay. Since these laws altered an important component of governance, the threat of takeover, they provide a natural testing ground for theories of executive compensation. Under skimming models, where entrenched CEOs pay themselves, we would expect mean pay to rise as less governed CEOs manage to skim more. Under contracting models, where a principal optimally sets pay, we would expect a fall or no effect in mean pay since CEOs no longer need to be compensated for the risk of takeover. We might expect, however, a rise in use of pay for performance to offset the reduced incentives. Consistent with skimming, we find that mean pay rose in firms affected by the laws relative to a control group. Moreover, the rise in pay was largest in firms that did not have a large shareholder present prior to the law. Turning to pay for performance, we find evidence of a rise in pay for performance on accounting measures. This rise, however, seems to have been concentrated in firms with large shareholders. Together, these results suggest that firms without large shareholders match more closely the skimming model. The optimal contracting model, on the other hand, may have more relevance in the presence of a large shareholder who can serve as the principal these models posit.
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