Performance pay, CEO dismissal, and the dual role of takeovers

Mike Burkart and Konrad Raff

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We propose that an active takeover market provides incentives by offering acquisition opportunities to successful managers. This allows firms to reduce performance-based compensation and can rationalize loss-making acquisitions. At the same time, takeovers remain a substitute for board dismissal in the replacement of poorly performing managers. The joint impact of the two mechanisms on managerial turnover is, however, multi-faceted: In firms with strong boards, turnover and performance-based pay are non-monotonic in the intensity of the takeover threat. In firms with weak boards, turnover (performance-based pay) increases (decreases) with the intensity of the takeover threat. When choosing its acquisition policy and the quality of its board, each firm ignores the adverse effect on other firms' acquisition opportunities and takeover threat. As a result, the takeover market is not sufficiently liquid and too few takeovers occur.

Keywords: takeover; board interference; CEO turnover; compensation (search for similar items in EconPapers)
JEL-codes: G34 J33 J63 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2011-11-01
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http://eprints.lse.ac.uk/119058/ Open access version. (application/pdf)

Related works:
Journal Article: Performance Pay, CEO Dismissal, and the Dual Role of Takeovers (2015)
Working Paper: Performance pay, CEO dismissal, and the dual role of takeovers (2015)
Working Paper: Performance Pay, CEO Dismissal, and the Dual Role of Takeovers (2012)
Working Paper: Performance Pay, CEO Dismissal, and the Dual Role of Takeovers (2011)
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