Managerial incentives in corporate decisions

Dimopoulos, Theodosios (2010) Managerial incentives in corporate decisions. Doctoral thesis, University of London: London Business School.

Abstract

This dissertation studies three mechanisms of managerial disciplining and incentive alignment proposed in the Corporate Finance literature: Executive turnover, managerial compensation and takeovers. The first chapter compares the determinants of CEO turnover and its implications for corporate performance in two fundamentally different corporate governance regimes, the U.K. and Germany. It shows that even though both systems hold CEOs accountable for poor performance, the relative importance of alternative monitoring mechanisms for managerial disciplining is different in the two countries. Furthermore, it shows that both systems are efficient in making turnover decisions that can yield performance gains for underperforming firms. The performance gains obtain primarily from external appointments in the U.K., but that is not the case for Germany. The second chapter is a theoretical exploration of the relationship between personal wealth, managerial incentives and firm performance. We introduce internal habit formation in a continuous time principal agent model and show that the manager's incentives to exert effort decline more slowly as wealth accumulates when habit formation is present. This prediction is consistent with recent empirical evidence which document a weak relationship of firm performance with managerial personal wealth. The third chapter studies a primary disciplinary mechanism which involves a shift of corporate control, namely takeovers. In particular, the chapter develops an empirical framework to evaluate two leading theories proposed in the literature to explain the sources of high takeover premia: pre-emptive bidding and target resistance. It develops a structural estimation approach which encompasses both explanations and shows that takeover premia are mainly determined by target resistance rather than pre-emptive bidding.