The Market for Corporate Control and CEO Compensation: Complements or Substitutes?

Cheng, Shijun; Indjejikian, Raffi J.
September 2009
Contemporary Accounting Research;Fall2009, Vol. 26 Issue 3, p701
Academic Journal
We study the relation between firms' internal governance mechanisms and the market for corporate control by examining how chief executive officer (CEO) compensation changed following the enactment of anti-take-over laws by various slates in the 1980s. We find that CEOs are paid more after controlling for performance and their compensation is more sensitive to performance (both stock returns and accounting return on assets) following the enactment of these laws. We also find that the increased sensitivity to performance is attributable only to the "good luck" components of stock returns and accounting return on assets (defined as the positive components of performance attributed to market and industry factors). We interpret these findings as evidence that the market for corporate control and CEO compensation are complementary governance mechanisms.


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