Performance Pay, CEO Dismissal, and the Dual Role of Takeovers
Mike Burkart and
Konrad Raff ()
FMG Discussion Papers from Financial Markets Group
We propose that an active takeover market provides incentives by o¤ering acqui- sition opportunities to successful managers. This allows ?rms 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 per- forming managers. The joint impact of the two mechanisms on managerial turnover is, however, multi-faceted: In ?rms with strong boards, turnover and performance- based pay are non-monotonic in the intensity of the takeover threat. In ?rms with weak boards, turnover (performance-based pay) increases (decreases) with the in- tensity of the takeover threat. When choosing its acquisition policy and the quality of its board, each ?rm ignores the adverse e¤ect on other ?rms?acquisition oppor- tunities and takeover threat. As a result, the takeover market is not su¢ ciently liquid and too few takeovers occur.
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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)
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