Contractual Revisions in Compensation: Evidence from Merger Bonuses to Target CEOs
Eliezer M. Fich
Drexel University - Department of Finance
Edward M. Rice
University of Washington - Michael G. Foster School of Business
Anh L. Tran
City University London - Sir John Cass Business School
May 13, 2014
Do all types of extra payments to target CEOs during acquisitions facilitate a wealth transfer from target shareholders to acquirer shareholders? We examine merger bonuses and document evidence inconsistent with wealth transfer. While we find that premiums to target shareholders are lower when their CEOs get a merger bonus, our tests also show that in these transactions, acquirers pay less but also get less in the form of low synergies. In fact, both stock and accounting returns to the acquirers are lower in deals with target CEO bonuses. This evidence suggests that bonuses are used to revise compensation contracts when takeovers generate small synergy gains, helping firms circumvent conflicts of interests between target CEOs and their shareholders.
Number of Pages in PDF File: 43
Keywords: Merger bonus, Acquisitions, Synergies
JEL Classification: G30, G34, J33
Date posted: September 2, 2012 ; Last revised: May 14, 2014
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