Sunday, February 13, 2011
CEO Compensation Contagion: Evidence from an Exogenous Shock, by Frederick L. Bereskin, University of Delaware, and David C. Cicero, University of Delaware - Lerner College of Business and Economics, was recently posted on SSRN. Here is the abstract:
We identify an exogenous event that resulted in a subset of U.S. firms increasing CEO compensation, and show that many other firms responded by increasing their CEOs’ compensation as well. The exogenous event was the development in Delaware case law in the mid-1990s that greatly increased Delaware-incorporated firms’ ability to “just say no” to hostile takeovers. In response, firms where managers had the greatest protection from outside shareholders substantially increased CEO compensation. Firms not directly impacted by the legal changes increased their CEOs’ compensation when the legal changes directly affected a substantial number of firms in their industry. As a whole, our results support the contagion effect hypothesized by Gabaix and Landier (2008) modified to account for differing levels of competition for CEOs across industries, and firm-specific governance. Compensation contagion provides a compelling partial explanation for the large increases in CEO compensation in the 1990s.