In the German two-tiered system of corporate governance, it is not uncommon for chief executive officers (CEOs) to become the chairman of the supervisory board of the same firm upon retirement. This practice has been the subject of controversial debate because of potential conflicts of interest. As a member of the supervisory board, the former CEO must monitor his successor and former colleagues and is involved in setting their pay. We analyze a panel covering 150 listed firms over a 10-year period. Consistent with a leniency bias, we find evidence that firms in which a former CEO serves on the supervisory board pay their executives more. We further find weak evidence that the compensation of the members of the supervisory board is also higher. Short-run event study results indicate that the announcement of the transition of a retiring CEO to the supervisory board is considered good news. Thus, despite the increases in executive compensation we document, CEO transitions are not a cause of concern for shareholders.

We analyze how the introduction of repurchases in 1998 affected the payout policy of German firms. To this end, we estimate Lintner (1956) partial adjustment models for both dividends and total payouts. We also analyze the implications for payout of changes in both permanent and transitory earnings. Our results are inconsistent with the hypothesis that dividends and repurchases are perfect substitutes. We also find that repurchases have not taken over the role of special dividends. Our results support the flexibility hypothesis that predicts that (regular) dividends are used to disburse permanent, and more flexible payout methods (special dividends and repurchases) transitory, earnings.