Seminar

Performance Pay, CEO Dismissal and the Dual Role of Takeovers

Konrad Raff (Toulouse School of Economics-GREMAQ), and Mike Burkart (Stockholm School of Economics)

November 26, 2009, 12:45–14:00

Toulouse

Room MF 323

Brown Bag Seminar

Abstract

We propose that the takeover market mitigates agency conflicts by creating acquisition opportunities for successful managers, allowing shareholders to reduce monetary incentives. As a consequence, shareholders commit to finance not ony profitable but also some unprofitable takeovers. While board interference and the takeover threat are substitutes, their joint impact on managerial turnover is multifaceted: in firms with strong boards, turnover and performance pay are non-monotonic in the intensity of the takeover threat. In firms with weak boards, turnover (performance pay) increases (decreases) with the intensity of takeover pressure. An externality between firms' choices of governance arrangements arises. In equilibrium there is excessive board interference which forces all firms to pay higher compensation.