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“Corporate Compensation: Does it matter?"
Coauthor(s): Bronson Argyle
Using two different regression strategies (Two Step MLE and Instrumental Variables), I examine the possible effect of hostile takeovers and proposed proxy contests on three corporate policy variables: i) Dividend Yield, ii) Stock Repurchases, and iii) Cash Holdings. The MLE approach (using Tobin's Q to determine activism events) finds activism events have a significantly negative effect on Cash Holdings implying CEOs drain target firms of slack. The IV approach (using Amihud's illiquidity measure to instrument for activism events) finds a signicantly positive effect on Dividend Yields implying CEOs increase dividends to assuage disgruntled shareholders. Neither regression class finds activism events to be a significant factor in Stock Repurchase decisions.
Bronson Argyle "“Corporate Compensation: Does it matter?"." , Columbia Business School, (2010).