Texas Law Review, Volume 96, Number 2, December 2017 Page: 239
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CEO Pay Redux
in the market capitalization of this reference firm indicate increased
competition for managerial talent.132
To capture product-market competition, Product Competition, we use
the Herfindahl-Hirschman concentration index, with data obtained from the
Compustat annual data file. The Herfindahl-Hirschman index is a measure
of industry concentration based on sales (using all publicly traded firms in
the industry).133 For convenience, we present Product Competition as the
negative of the Herfindahl-Hirschman concentration index, so that a lower
Herfindahl-Hirschman index indicates a lower industry concentration and
hence higher Product Competition.134
Further, we also employ M&A Competition, which is a proxy for the
level of M&A activity per industry.135 We retrieve data for M&A Competition
from the SDC Platinum database offered by Thomson Reuters, which
provides comprehensive information on all M&A activity in the United
States. The rationale behind the use of this measure is that the level of M&A
activity captures the level of an industry's shareholder pressure as operating
through the takeover channel.136
Lastly, we add a set of standard controls, including leverage (Leverage),
the ratio of capital expenditures over the book value of total assets (CAPX/
Assets), the ratio of research and development expenditures over sales (R&D/
Sales), an indicator variable for whether the firm is incorporated in Delaware
(Delaware Incorporation), and the firm's profitability (Profitability).
Appendix Tables A-B provide a brief definition of all our variables,137 while
descriptive statistics are presented in Appendix Table C.
use the equity market cap, consistent with the prior work of one of us on managerial talent
competition. See Cremers & Grinstein, supra note 85, at 932.
132. See Gabaix & Landier, supra note 71, at 49-51.
133. See Cremers & Grinstein, supra note 85, at 932, 937. Since Product Competition is at
industry level, it arguably has the advantage of not being (fully) under the firm's control, which
mitigates endogeneity concerns.
134. We acknowledge that our measure of product competition is imperfect as it is actually a
measure of market concentration. Indeed, there could be concentrated industries that are also
competitive. In general, however, more concentrated industries will be less likely to be competitive
(and vice versa), which makes our measure a plausible proxy for competition.
135. We adapt this measure from the prior work of one of us with Allen Ferrell. See Martijn
Cremers & Allen Ferrell, Thirty Years of Shareholder Rights and Firm Value, 69 J. FIN. 1167, 1172
(2014) (introducing a new dataset on shareholder governance rights, spanning from 1978 to 2006).
Like Product Competition, Market Competition is at industry level, and, therefore, we can assume
plausible exogeneity at the firm level.
136. See id. at 1190-92 (suggesting that "the association between shareholder rights and firm
value arises primarily through a 'takeover channel,' that is, through affecting the probability of an
offer being received and accepted").
137. We emphasize that we reduce the importance of outliers in the data by consistently
winsorizing each continuous variable at the 1% level on both sides of the distribution.2017]
239
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Texas Law Review Association. Texas Law Review, Volume 96, Number 2, December 2017, periodical, December 2017; Austin, Texas. (https://texashistory.unt.edu/ark:/67531/metapth1115391/m1/47/: accessed July 18, 2024), University of North Texas Libraries, The Portal to Texas History, https://texashistory.unt.edu; crediting UNT Libraries Government Documents Department.