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Wall Street’s Attitude to CEO-to-Employee Pay-Ratio: Evidence from M&As

Date

2023-09-25

Journal Title

Journal ISSN

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Type

Thesis

Degree Level

Masters

Abstract

Using merger and acquisition (M&A) announcements from 2018 to 2021 by S&P 1500 firms in the United States as a corporate event, we aim to further understand the debate surrounding within firm income inequality in executive compensation in U.S companies. We found that the M&A announcement period abnormal returns positively related to acquirer’s CEO-to-Employee Pay Ratio. However, we note that such an effect is more pronounced when the target is not a publicly traded firm. Our core findings are consistent with Optimal Contracting Theory, Shareholder Value view and Talent Assignment Hypotheses. Market perceives firms likely pay higher compensation to attract more talented CEOs, which contributes to within firm pay disparity. In other words, these findings also imply that market perceives more talented CEOs likely have stronger bargaining power to extract larger share of company’s rents, as such CEOs would likely be able to make firm value maximizing acquisitions.

Description

Keywords

M&A, market reaction, CEO-to-Employee Pay Ratio, Pay-Ratio, Cumulative Abnormal Returns (CAR), Optimal Contracting, Tournament Incentives, firm pay disparity.

Citation

Degree

Master of Science (M.Sc.)

Department

Finance

Program

Finance

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