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Essays on Executive Compensation and Managerial Entrenchment.

Research output: ThesisDoctoral Thesis

Unpublished
Publication date2013
Number of pages227
QualificationPhD
Awarding Institution
Place of PublicationLancaster
Publisher
  • Lancaster University
Electronic ISBNs9780438570399
Original languageEnglish

Abstract

This thesis is comprised of three empirical studies on CEO pay and CEO turnover in the USA. It specifically examines the effects of the market for corporate control and governance on CEO turnover and CEO pay, and the effect of risk of dismissal on CEO pay. Using data on CEO pay, CEO turnover and acquisitions in the US, we analyze the risk of CEO turnover in the period 1992-2010 and the effect of market for corporate control on turnover probability. 31% of the CEOs in the sample are replaced in this period, either for performance related reasons or following takeovers. Post Sarbanes-Oxley act of 2002, the performance sensitivity of turnover is stronger and CEOs face a higher dismissal risk, which indicates partial success of governance regulations in mitigating agency problems. Small and more independent boards are associated with higher likelihood of CEO exit. Takeovers act as external force of discipline and increase the probability of turnover for poor performing CEOs by 129%. These results contribute to the debate on the role of governance regulations in enforcing optimal contracting. Next, we examine the impact of acquisitions on the pay of acquiring CEOs to explore whether acquisitions exacerbate the divergence of interest between shareholders and CEOs. To examine systematic agency problems, we further examine if CEOs are rewarded differentially for shareholder wealth-generating (good) and shareholder wealth-destroying (bad) acquisitions. Controlling for firm size, our estimates suggest that CEOs are paid a 3.5-4% premium in post-acquisition pay, which increases the pay of the median CEO of an acquiring firm in the sample by US$ 173,000. Consistent with the earlier studies by Bliss and Rosen (2001), we find no evidence that post-acquisition premium in CEO pay is conditional upon the ex-post wealth-effect of the acquisition, thereby suggesting possible decoupling of pay and performance following acquisition. Further, our results that acquisition premium in CEO pay can be partially attributed to weak corporate governance is in agreement with managerial power and rent-seeking hypotheses. Controlling for post-acquisition survivor bias, we observe a smaller acquisition premium in CEO pay which may suggest that stronger governance exposes CEOs undertaking bad acquisitions to higher risk of turnover. Average CEO Pay has grown significantly in the last two decades but so has the risk of forced turnover. Most explanations for increased CEO compensation focus on market power - the increased competition in the external CEO market, or entrenchment - rent extraction by CEOs from captured boards. We attempt to provide an alternate explanation for the recent growth in CEO pay. We estimate the compensating differentials in CEO pay for increasing risk of dismissal. Our estimates suggest that CEOs are paid 2-4% premium in pay for a percentage point increase in the risk of dismissal, which is manifest in the form of increased cash payments. The compensating differential is higher in the post- Sarbanes Oxley sub-period (2003-2010). The increasing use of risk-free cash payments to compensate for higher turnover risk may lower the performance sensitivity in CEO pay. We highlight this as a possible inadvertent effect of governance regulations.

Bibliographic note

Thesis (Ph.D.)--Lancaster University (United Kingdom), 2013.