Decoupling CEO Wealth and Firm Performance: The Case of Acquiring CEOs



  • KAI LI

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    • Harford is from University of Washington Business School and Li is from Sauder School of Business, University of British Columbia. We thank the editor, Rob Stambaugh; an associate editor; an anonymous referee; Qiang Cheng; Ken French; Gerry Garvey; Yaniv Grinstein; Wayne Guay; Rob Heinkel; Dirk Jenter; Jon Karpoff; Alan Kraus; Rafael La Porta; N.R. Prabhala; Eric Santor; Terry Shevlin; and Zheng Zhang for helpful discussions. We're also grateful to seminar participants at Dartmouth College, Erasmus University Rotterdam, Humboldt University, K.U. Leuven, Massachusetts Institute of Technology, Massachusetts Institute of Technology finance lunch seminar, the finance journal club at the University of British Columbia, Southern Methodist University, University of British Columbia, University of Iowa, University of Washington, and participants in the 2004 Financial Research Association Meetings (Las Vegas), JFI/CRES/Towers Perrin Conference on Corporate Governance (St. Louis), University of Maryland's 6th Finance Symposium (College Park), Northern Finance Association meetings (Quebec City), and 2005 China International Conference in Finance (Kunming) for comments. We acknowledge financial support from the Social Sciences and Humanities Research Council of Canada and the UBC-HSS research grant. Li also acknowledges the financial support of the Massachusetts Institute of Technology Sloan School of Management and the W.M. Young Chair in Finance from the Sauder School of Business at the University of British Columbia. We are responsible for all errors.


We explore how compensation policies following mergers affect a CEO's incentives to pursue a merger. We find that even in mergers where bidding shareholders are worse off, bidding CEOs are better off three quarters of the time. Following a merger, a CEO's pay and overall wealth become insensitive to negative stock performance, but a CEO's wealth rises in step with positive stock performance. Corporate governance matters; bidding firms with stronger boards retain the sensitivity of their CEOs' compensation to poor performance following the merger. In comparison, we find that CEOs are not rewarded for undertaking major capital expenditures.