Does the Relation between Executive Compensation and Firm Size Explain the Large Takeovers of the 1980s?

Jensen (1986), among others, suggests that executives may increase firm size beyond the optimum because executive compensation relates positively to firm size. We test this hypothesis by (i) analyzing changes in executive compensation around large acquisitions, and (ii) by comparing executive compensation of firms that undertake large acquisitions to a sample of industry and size matched (non-acquiring) firms. For firms undertaking large acquisitions we find an increase in cash compensation, but no increase in total compensation, in the post acquisition years. This result may be partially attributable to the presence of a positive quot;compensation-sizequot; relation for the acquiror, but not for the control sample, in the pre- acquisition years. Overall, our results provide partial evidence that executive compensation considerations may have induced managers to undertake large acquisitions in the 1980s