Merger Bonuses, Synergies, and Target Shareholder Wealth
Eliezer M. Fich
Drexel University - Department of Finance
Edward M. Rice
University of Washington - Michael G. Foster School of Business
Anh L. Tran
Cass Business School, City University London
November 10, 2011
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, J33working papers series
Date posted: January 24, 2012 ; Last revised: September 25, 2012
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