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Executive Pay and Incentives

Paper Session

Sunday, Jan. 5, 2025 10:15 AM - 12:15 PM (PST)

San Francisco Marriott Marquis, Yerba Buena Salon 9
Hosted By: American Finance Association
  • Dirk Jenter, London School of Economics and Political Science

Growth-promoting Bonuses and Mergers and Acquisitions

Tor-erik Bakke
,
University of Illinois-Chicago
Mathias Kronlund
,
Tulane University
Hamed Mahmudi
,
University of Delaware
Aazam Virani
,
University of Arizona

Abstract

One-third of U.S. top executives have bonus incentives that are explicitly tied to the firm's size. We study how such ``growth-promoting bonuses'' influence firms' mergers and acquisitions (M&A) activities. We find that firms with bonus structures that promote growth are more prone to make acquisitions — especially acquisitions of a scale that help meet the bonus size target. We use shocks to sales from plausibly exogenous exchange-rate changes for exporting firms to identify these effects. Acquisitions by firms with growth-promoting bonuses have significantly lower abnormal returns, destroying value for the acquirers on average. These lower acquirer returns can be attributed to the selection of targets with lower synergies and, to a lesser extent, higher premiums paid. The growth-promoting bonuses tend to be sufficiently large such that — despite negative acquirer returns — the net monetary effect for executives who meet their sales bonus targets with a merger remains significantly positive.

Executive Compensation with Environmental and Social Performance

Pierre Chaigneau
,
Queen's University
Nicolas Sahuguet
,
HEC - Montréal

Abstract

How to incentivize a manager to create value and be socially responsible? A manager can predict how his decisions will affect measures of social performance, which are (randomly) biased. He will therefore game an incentive system that relies on these measures. Still, we show that the compensation contract is based on measures of social performance when the level of social investments preferred by the board exceeds the one that maximizes the stock price. When these measures are used, social investments are distorted because of gaming, and the sensitivity of pay to social performance is reduced to mitigate this effect. Relying on multiple measures based on different methodologies will generally mitigate inefficiencies due to gaming, unless social performance measures' biases are highly positively correlated. This implies that harmonization of social performance measurement can backfire.

Non-Compete Agreements and the Market for Corporate Control

Andrey Golubov
,
University of Toronto
Yuanqing (Lorna) Zhong
,
University of Toronto

Abstract

Non-compete agreements (NCAs) limit outside employment options and, therefore, increase personal costs of job displacement for managers. Using state-level changes in NCA enforceability as a natural experiment, we find that managers are more averse to horizontal takeovers when NCA enforcement tightens. In particular, higher enforceability is associated with fewer sameindustry takeovers. Those that do materialize are more likely to be hostile, involve higher premiums, and are less likely to complete. Overall, the findings indicate that the use of NCAs and their enforceability have important implications for the market for corporate control and that banning NCAs could actually promote consolidation.

Does Better Access to Disclosure Curb CEO Pay? Evidence from a Modern Information Technology Improvement

Ilona Babenko
,
Arizona State University
Ben Bennett
,
Ohio State University
Zexi Wang
,
Lancaster University

Abstract

We provide evidence that better access to disclosure curbs CEO pay. Using a difference-in-differences estimation around the staggered implementation of the SEC EDGAR platform from 1993 to 1996, we find that total CEO pay drops by 7-15% following EDGAR implementation. This effect is more pronounced for highly-paid CEOs, equity-based pay, and firms with unions or those located in left-leaning states. Media coverage of executive pay increases following EDGAR adoption, particularly around proxy filing dates. Additionally, we find higher voluntary CEO turnover post-EDGAR, with the market showing a more negative response to CEO turnover announcements, suggesting negative implications for firm value.

Discussant(s)
Jarrad Harford
,
University of Washington
Doron Levit
,
University of Washington
Jessica Jeffers
,
HEC - Paris
Michelle Lowry
,
Drexel University
JEL Classifications
  • G3 - Corporate Finance and Governance