CEO Relative Compensation, Takeover Premium and Bidder Performance in Australia : Efficient Contracting or Managerial Power?

This paper analyses the impact of CEO relative compensation on takeover premiums and bidder performance. Based on a sample of takeover deals between Australian listed targets and bidders from 2000 to 2015, we find that there is insignificant difference between bid premiums offered by CEOs who are paid a higher relative compensation to other directors on the board compared with that of deals undertaken by CEOs with lower relative compensation. The correlation between CEO relative compensation and bidders' announcement return is significantly negative, while its association with one-year post-takeover is in an upward direction, which is in a sharp contrary to the US and UK markets. In the two years' time, the outperforming effect becomes marginal and insignificant. Overall, our findings largely support the efficient contracting theory to have more explanatory power in the Australian context