The following study critically examines the actions and underlying incentives of public corporate governors in response to unsolicited tender offers. Using established theoretical frameworks, this thesis hypothesizes that takeover target managers and directors will tend to respond to personal financial incentives and risks in lieu of shareholder wealth concerns. Indeed, the past literature on the subject has mostly reflected this result; however, no recent study has determined conclusively if this trend is harmful to shareholders. Using methodology reflecting that of the successful past research, the empirical models test the explanatory power of the following variables on bid resistance by target firms over a sample of 64 tender offers spanning from 2004 to 2012: Hostility (defined as the intention of the bidder to replace target management), Bid Premium (the only variable of concern to shareholders), Managerial Wealth Change (a variable representing the immediate capital gains facing the top managers and directors as a result of the takeover) and Managerial Stock Ownership (as a percentage of total shares, and as the natural logarithm of total shares held by top managers and directors). The relationships highlighted by the data will be compared in their explanatory power and statistical significance to determine if shareholders, and thus the greater capital markets, should be concerned about the potential results of a misalignment of principal and agent incentives.
The 2008 financial crisis has left researchers investigating the inefficiencies that prompted the collapse of the credit and investment markets. This study considers the implications of excessive executive pay on capital structure during the years 2005 through 2007. The hypothesis proposes that for firms in the financial sector, executives awarded generous compensation packages compared to salary implemented a higher use of debt in their firm's capital structure. Agency theory, capital structure composition, the Efficient Market Hypothesis, and behavioral finance principles represent key economic theories supporting the hypothesis. The study examines data on 31 firms in the financial sector and 31 firms in the manufacturing sector to empirically test the relationship between executive pay and leverage. Cross-sectional analysis of nine models reveals that compensation is a significant determinant of a firm's total debt-to-total assets ratio for the financial sector, while the manufacturing sector yielded insignificant findings. The results further evidence that within the financial sector, the greatest relationship between compensation and leverage occurred when a one- or two-year lag between executive pay and the debt ratio was in effect. These findings reveal sources of agency conflicts and behavioral biases within the financial sector during the three years preceding the financial collapse.