An executive compensation contract, especially when it comprises equity-based remuneration, ought to align the managerial objectives with those of shareholders. In our paper Takeovers and (Excess) CEO Compensation, we study if a CEO’s equity-based compensation—especially when it seems excessive—affects the choice and expected value generation in takeovers announced by European firms.

According to the optimal contracting theory, equity-based compensation of top executives may be effective in shaping long-term corporate investment policies and encourage managers to make decisions that do not hurt the return required by shareholders. Giving shareholder-oriented incentives to top management leads to better takeover decisions (this is at least what the market seems to believe). Managers pay lower premiums for target firms in takeovers and undertake more risky investments when they receive high levels of equity-compensation. Therefore, stock option-based compensation motivate managers to take on projects that maximize shareholders’ value (even in the absence of active ownership).

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