This study investigates the effects of insider entrenchment on Chief Executive Officer (CEO) compensation in firms conducting an initial public offering (IPO). The sample comprises 220 US firms that went public between 1996 and 2002. Corporate governance choices regarding entrenchment are captured by six provisions in the corporate charter and bylaws, as well as five anti-takeover statutes, which may or may not be in effect in the state of incorporation. Firm-level items are supermajority requirements for charter amendments, bylaws amendments, and merger approvals, along with the presence or absence of a staggered board of directors, poison pills, and golden parachute agreements. The anti-takeover laws examined are Business Combination, Control Share Acquisition, Fair Price, Poison Pill Endorsement, and Constituencies Statutes. A factor analysis reveals three distinct components of entrenchment: firm- and state-level external entrenchment and firm-level internal entrenchment. External entrenchment is related to market control over management by means of corporate takeovers; internal entrenchment relates to shareholder control over management by means of their voting power. Evidence is found for a positive association between entrenchment at IPO and subsequent CEO cash and total compensation. These relationships are driven by firm-level external entrenchment. Firm-level external entrenchment is also significantly and positively associated with CEO stock-based compensation. The positive effects of entrenchment at IPO on CEO compensation appear not to be transitory and remain constant for at least five years post-IPO. Furthermore, entrenchment at IPO is shown to affect CEO pay-for-performance sensitivity. On balance, entrenchment reduces the sensitivity of CEO compensation to stock returns and returns on assets. The results of this study underscore the crucial importance of insiders' governance decisions made at the time of the IPO. Little support is found for a re-balancing of components of the CEO's compensation contract in response to entrenchment as predicted under the optimal contracting theory of compensation contracts. The findings of this study are almost entirely consistent with the managerial power theory, according to which entrenchment at IPO causes a permanent shift in bargaining power, which enables CEOs to influence compensation contracts in their favor.

Recent research has suggested that interest alignment, i.e., the degree to which members of an organization are motivated to behave in line with organizational goals, is a source of competitive advantage that can generate rents for the firm (Gottschlag and Zollo, 2007). Drawing on agency theory, this dissertation tests whether the interest alignment premise manifests itself differently in the strategic behavior of family-controlled firms when compared to their nonfamily peers. In particular, for firms in the S&P 500, I evaluate the results of two important strategic policies; mergers and acquisitions, as well as CEO compensation practices. In studying acquisitions made by family and nonfamily firms in the S&P 500 index from 1992-2006, I find that family firms are more careful when embarking on actions leading to mergers than non-family firms, as evidenced by their selection of smaller targets and targets who are in related businesses. I also find that there is a preponderance of cash purchases by family firms that does not vary with market movements and that completion times for merger transactions are shorter than for non family firms. The care and concern with which family-controlled firms choose their "mates" translates into higher stock returns when compared with non-family firms. Overall, I believe that family-controlled firms derive value from their merger and acquisition strategy. With regard to CEO compensation practices, I find that family firms provide strong incentives to the CEO for superior performance but pay significantly lower than nonfamily firms in terms of both salary and stock-based pay. The pay-for-performance sensitivity between annual stock returns and total compensation is significantly greater for family firms in general, and for family CEOs when compared with compensation of CEOs in nonfamily firms. The pay-for-performance sensitivity is in turn positively related to firm performance, suggesting that firms with greater pay-for-performance sensitivity (family controlled firms) also perform better. The analyses in my thesis thus illustrate that family-controlled firms and non-family firms in the S&P 500 differ in their strategic decision-making. It would be fair to say that family firms have longer investment horizons and give deliberate thought to expending resources whether for acquisitions or for CEO pay, and may suffer lower agency costs than nonfamily firms due to family governance (and public monitoring) which may lead to their relative superior performance. This dissertation finds that each acquisition made by a family controlled firm generates an extra return of 0.50% when compared with a nonfamily firm, and family controlled firms earn 0.50% every year directly attributable to pay-for-performance sensitivity. The study thus underlines and reiterates the importance of instilling the long-term view in the management of all firms, lowering agency costs, and aligning the interests of managers with those of stockholders for superior financial performance / Ph. D.