Endogenous Contracting 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
Cass Business School, City University London
May 3, 2013
Several papers find that when target CEOs get extra benefits during mergers, takeover premiums are lower. This is interpreted as a conflict of interest: target CEOs sacrifice premiums for personal gain, facilitating a wealth transfer from target to acquirer shareholders. We examine merger bonuses and find evidence inconsistent with wealth transfer. Results indicate that when target CEOs get bonuses, acquirers pay less but also get less in the form of low synergies. The evidence suggests that bonuses arise endogenously when takeovers generate small synergy gains helping firms circumvent conflicts of interests between target CEOs and their shareholders.
Number of Pages in PDF File: 49
Keywords: Merger bonus, Acquisitions, Synergies
JEL Classification: G30, G34, J33working papers series
Date posted: September 2, 2012 ; Last revised: May 5, 2013
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