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We propose that an active takeover market provides incentives by offering acquisition opportunities to successful managers. This allows firms to reduce performance-based compensation and can rationalize loss-making acquisitions. At the same time, takeovers remain a substitute for board dismissal in the replacement of poorly performing managers.
When choosing its acquisition policy and the quality of its board, each firm ignores the adverse effect on other firms’ acquisition opportunities and takeover threat. As a result, the takeover market is not sufficiently liquid and too few takeovers occur. Furthermore, the liquidity in the takeover and managerial labour markets are inversely related. When poaching successful managers becomes more profitable, firms invest more in their internal governance which in turn reduces the incidence of takeovers.
Recent research shows that a high wage gap between managers and workers identifies better-performing firms, but the stock market does not seem to price...
We document a new channel through which a firm’s sustainability policies can contribute positively to its bottom line, by reducing labor costs and by...
We document that, over the last decade, the cross-sectional variation in CEO pay levels has declined precipitously, both at the economy level and within...