NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Executive Compensation and Incentives: The Impact of Takeover Legislation

Marianne Bertrand, Sendhil Mullainathan

NBER Working Paper No. 6830
Issued in December 1998
NBER Program(s):   LS

We investigate the impact of changes in states' anti-takeover legislation on executive compensation. We find both pay for performance sensitivities and mean pay increase for the firms affected by the legislation (relative to a control group). These findings are partially consistent with an optimal contracting model of CEO pay as well as with a skimming model in which reduced takeover fears allow CEO's to skim more. We compute lower bounds on the relative risk aversion coefficients implied by our findings. These lower bounds are relatively high, indicating that the increase in mean pay may have been more than needed to maintain CEO's individual rationality constraints. Under both models however, our evidence shows that the increased pay for performance offsets some of the incentive reduction caused by lower takeover threats.

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Document Object Identifier (DOI): 10.3386/w6830

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