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M&A activity and CEO compensation - Does it pay to acquire? - Evidence from the U.S
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School of Business |
Master's thesis
Electronic archive copy is available via Aalto Thesis Database.
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en
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40 + 5
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Abstract
Mergers and acquisitions (M&A) are among the most significant investment decisions executives can make. Prior research suggests that these investments have not increased shareholder value in the short-term (e.g. Malatesta, 1983; Jarrel & Poulsen, 1989) or in the long-term (e.g. Loderer & Martin, 1992; Agrawal et al., 1992). Further, there is extensive research suggesting that these significant and visible investments actually destroy shareholder value (e.g. Datta et al., 1992, King et al., 2004; Moeller et al., 2003). If these investments don’t generally increase shareholder wealth, why do companies acquire?
Prior studies have argued that primary reasons for M&A are market power, efficiency, resource redeployment and market discipline (Haleblian et al., 2009). However, there is significant amount of studies making the opposing arguments that acquisitions are driven by managerial self-interest as executives act in their own best interest instead of maximizing shareholder wealth. This assumption is supported by evidence that the CEOs compensation usually increases even though the acquisition would destroy value due to generous equity-based compensation (Harford & Li, 2007), M&A bonuses (Grinstein & Hribar, 2004) and other forms of compensation (Bliss & Rosen, 2001; Coakley & Iliopoulou, 2006) which offset the potential decrease in CEO wealth due to declining stock price.
This topic is interesting as it combines M&A and compensation literature, both of which are complex topics by themselves. These topics are linked as some acquisitions may represent agency costs due to different interests of CEOs and shareholders. Investigating CEOs incentives related to acquisitions and mergers increases knowledge on how effective the current incentives for CEOs are and how they are linked to acquisitions and mergers.
I find that CEO’s of acquiring companies received increased compensations after the deal compared to non-acquiring CEOs. The results indicate an increase of $156k in salary and $3.6m in total compensation for CEOs that have undergone an acquisition. Duality is also positive and significant variable in my regressions indicating that CEOs being also Chairmen receive increased compensation of $160k in salary and $1.7m in total compensation. In addition, I find that CEO power increases compensation following M&A measured by duality and board size. For every additional board member CEOs total compensation increased by $445k and cash compensation by $45k following M&A.