An empirical examination of the role of the manager's incentive compensation schedule in the decision to undertake a management buyout.

摘要

This essay is an empirical examination of the role of the manager's incentive compensation schedule in the decision to undertake a management buyout. The theoretical and empirical literature analyzing these transactions generally conclude that management buyouts are a solution to a severe shareholder-manager agency conflict faced by some public firms. The logic behind this argument is that the public firm does not provide a managerial incentive compensation schedule that sufficiently rewards the manager for successfully undertaking positive net present value projects and increasing shareholder wealth. The manager is therefore motivated to undertake a management buyout so that the restructured compensation schedule offered by the private firm provides sufficient motivation and remuneration for his efforts. The purpose of this study is to examine the incentive compensation schedules of managers who later undertake management buyouts, to determine if in fact there is support for the claim that the public firm's compensation schedule does not provide sufficient incentive and reward to the manager, and thus provides a motive to take the firm private. I examine the sensitivity of managerial compensation and firm-related wealth to changes in shareholder wealth for managers who take their firms private, and compare this sensitivity to that of managers of comparable firms that remain public. I use regression analysis and matched-pairs tests to evaluate the hypothesis that managers who later initiate management buyouts receive less remuneration for increasing shareholder wealth than managers of firms that remain public. I find no support for the argument that managers of future MBOs receive any less reward for increasing shareholder wealth than their counterparts at continuing public firms. I also examine the related hypothesis that managers of future MBOs face distorted incentives that lead them to focus on increasing earnings and sales, even at the expense of their shareholders' wealth. It is argued that an MBO provides the opportunity for these perverse incentives to be corrected. I find no evidence that managers who later attempt to take their firms private face these types of improper incentives.