Pay for Performance? CEO Compensation and Acquirer Returns in BHCs
FDIC Working Paper No. 2010-11
42 Pages Posted: 9 Jan 2012
Date Written: 2010
We examine how managerial incentives affect acquisition decisions in the banking industry. We find that higher pay-for-performance sensitivity (PPS) leads to value-enhancing acquisitions. Banks whose CEOs have higher PPS have significantly better abnormal stock returns around the acquisition announcements. On average, acquirers in the High-PPS group outperform their counterparts in the Low-PPS group by 1:4% in a three-day window around the announcement. Ex ante, higher PPS helps to reduce the incentives to make value-destroying acquisitions, while at the same time promote value-enhancing acquisitions. The positive market reaction can be rationalized by post-merger performance. Following acquisitions, banks with higher PPS experience greater improvement in their operating performance. We show that the effect of PPS is mainly driven by small and medium-sized banks, but is not present in large banks.
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