Merger Bonuses, Synergies, and Target Shareholder Wealth

Abstract:     
We develop two hypotheses to study merger bonuses provided to target CEOs during acquisitions: the self-serving-bargaining hypothesis and the low-synergy-target hypothesis. The first argues that bonuses indicate agency problems, with target CEOs sacrificing takeover premiums for personal gain. The alternative views bonuses as efficient CEO compensation when takeovers generate small gains. Consistent with both hypotheses, targets dispensing merger bonuses earn 3.89% lower premiums. However, merger announcement returns to acquirers when bonuses occur are indistinguishable from the returns to other bidders. Combined, these findings indicate that in deals where target CEOs get merger bonuses, bidders pay less to buy the target but they also get less in the form of low synergies.

Number of Pages in PDF File: 45

Keywords: Merger bonus, Acquisitions, Synergies

JEL Classification: G30, G34, J33

working papers series