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Does Threat of Dismissal Constrain Acquisition Premium in CEO Pay?
Author(s) -
Homroy Swarnodeep
Publication year - 2015
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/ecca.12163
Subject(s) - dismissal , shareholder , incentive , business , constraint (computer aided design) , control (management) , mechanism (biology) , actuarial science , economics , microeconomics , finance , corporate governance , management , law , political science , engineering , philosophy , epistemology , mechanical engineering
This paper shows that the likelihood of post‐acquisition CEO turnover can act as a constraint on risky acquisition decisions. The acquisition premium in pay decreases by over 50% once the dismissal risk is controlled for. Given a smaller pay premium for undertaking acquisitions and a non‐zero risk of dismissal, shareholders are shown to be able to exercise some control over managerial incentives to engage in risky acquisitions through the mechanism for dismissal.