Stock Performance or Entrenchment? The Effects of Mergers and Acquisitions on CEO Compensation

Abstract

Using a large sample of U.S. acquiring and non-acquiring firms and covering a broad sample of transactions, we examine the effects of mergers and acquisitions (M&A) on CEO compensation during 1993-2006, a period of intense M&A activity. We alleviate endogeneity concerns through dynamic panel data estimation, propensity score matching, and using a natural experiment of exogenous accounting regulatory changes in 2001 that significantly affected the benefits of stock-financed acquisitions. The level of M&A activity ceteris paribus has a significant and positive effect on CEOs' equity-based compensation. But the positive impact of M&A on compensation occurs through primarily stock-financed deals, and there is a positive interaction in the influence of recent stock returns and M&A activity on CEO compensation. However, the usual measures of CEO entrenchment and power do not significantly enhance the effects of M&A. Our analysis supports the view that rent-seeking CEOs use strong recent performance of their firm's stock to pursue stock-financed acquisitions that also positively impact their equity-based compensation.

Keywords: Executive compensation, Mergers and Acquisitions, Entrenchment, Stock Performance

JEL Classification: G30, G34, J33, M12