Executive careers and compensation surrounding takeover bids

1. Executive careers and compensation surrounding takeover bids • Two of the mechanisms to discipline managerial behavior: takeover market and managerial labor market (price and job security) • Additional information? • Who affects who? • Define the normal compensation • Robustness check is important!

2. Executive careers and compensation surrounding takeover bids • Population: Forbes 800 firms • Identify takeover attempts and their results from WSJ • Create samples of target and non-target [no bid from t-2 to t+1, same industry, and randomly select one firm only (why? see footnote 7)] • Obtain annual salary, bonus, securities, properties, benefits, contingent and long-term compensation from Forbes

3. Executive careers and compensation surrounding takeover bids • In table A1, the compensation is related to firm size, firm risk premium over the market, executive age, four (Why?) industry dummies, and four interaction terms between industry dummies and firm size • What if b4 is significantly positive? • What if b8 is significantly positive? • What observations should be included in regression? • How to capture time variation in parameters?

4. Executive careers and compensation surrounding takeover bids • How to get the mean in table 3? • Unexplained compensation of CEOs of target firms two years before the takeover bid is significantly positive. • But non-target firms is also positive! Why? • The whole industry is overcompensated • Overcompensation and takeover stem from the same underlying causes (eg: poor relative stock performance) • Model is mis-specified and overcompensation contains a systematically spurious component that is correlated with industry membership. (See footnote 8)

5. Executive careers and compensation surrounding takeover bids • No differences in t-2 abnormal compensations either between successful target and unsuccessful target, or between contested target and uncontested target • But CEOs retained after bid is more overcompensated in t-2 than CEOs dismissed. Counterintuitive! Why? • Statistical artifact by outliers: 14 rumored bids are included in the CEOs retained sub-sample • Entrenched managers: check on their insider ownership • Remaining CEOs are not overpaid but are earning rents on their firm-specific human capital • Remaining CEOs have superior performance • More overpaid CEOs have less attractive alternatives and therefore accept renegotiated contracts

6. Executive careers and compensation surrounding takeover bids • Table 4: distribution of CEOs dismissed from t-2 to t+1 • Table 5: why do these CEOs leave? • Table 6: benefits received following involuntary leave • Table 8: compensation changes from t-2 to t+1 for remaining executives: positive in either targets or non-targets! Why?

7. Executive careers and compensation surrounding takeover bids • Relation between post-bid adjustments in compensation and pre-bid abnormal compensation • DSALBi = b0 + b1*ESALBi + ei • In table 9, run the regression for remaining executives with inflation and industry adjusted and expect b1 to be negative! • Should use abnormal compensation in the left hand side? • What is two-stage regression?

8. Executive careers and compensation surrounding takeover bids • Results in table 9 may be due to mean reversion • DSALBi = b0 + b1*ESALBi + b2*NTi + b3*NTi *ESALBi + ei • If there is mean reversion, then b3 should be zero, otherwise be positive! • Results in table 9 may be due to mis-specification: try alternative measures for firm size and performance in the first stage regression

9. Executive careers and compensation surrounding takeover bids • Results in table 9 may be due to selection bias: can only include the remaining executives and dismissed executives are automatically excluded • EMPLOYED = f(RETYEAR, LEQUITY, Ri-Rm) • Run the Probit model and use the estimated probability as another independent variable in table 9 and 10. If the coefficient is insignificant and other coefficients remained unchanged, then there is no selection bias.

10. Executive careers and compensation surrounding takeover bids • Results in table 9 may be due to bid outcome • In unsuccessful bid, compensation adjustments occur when internal monitors adjust compensation. In unsuccessful bids, adjustments occur through re-contracting with new owners • DSALBi = b0 + b1*ESALBi + b2*Failedi + b3*FAILEDi *ESALBi + ei • Both b2 and b3 are insignificant

11. Executive careers and compensation surrounding takeover bids • Results in table 9 may be due to managerial response • Contested bids are more disciplinary and uncontested bids are more synergistic • Replace FAILED with CONTEST • Still insignificant!