Pay for Performance? CEO Compensation and Acquirer Returns in BHCs
39 Pages Posted: 25 Mar 2008 Last revised: 14 Sep 2014
Date Written: January 30, 2010
We examine the impact of managerial incentives on acquisitions in the banking industry. We find that banks whose CEOs have higher pay-for-performance sensitivity (PPS) are less likely to engage in value-reducing acquisitions. Conditional on engaging in acquisitions, those higher-PPS banks have significantly better announcement returns: on average these banks outperform the acquirers in the lower-PPS group by $1.4% in a three-day window around the announcement. The positive market reaction can be rationalized by long-term performance. Following acquisitions, banks with high PPS experience greater improvement in their operating performance as measured by ROA.
Keywords: Pay-for-Performance Sensitivity, CEO Compensation, Acquirer Returns
JEL Classification: G34, G21
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