Pay for Performance? CEO Compensation and Acquirer Returns in BHCs

FDIC Working Paper No. 2010-11

42 Pages Posted: 9 Jan 2012

See all articles by Kristina Minnick

Kristina Minnick

Bentley University

Haluk Unal

University of Maryland - Robert H. Smith School of Business

Liu Yang

University of Maryland

Multiple version iconThere are 2 versions of this paper

Date Written: 2010

Abstract

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.

Suggested Citation

Minnick, Kristina and Unal, Haluk and Yang, Liu A., Pay for Performance? CEO Compensation and Acquirer Returns in BHCs (2010). FDIC Working Paper No. 2010-11. Available at SSRN: https://ssrn.com/abstract=1982123 or http://dx.doi.org/10.2139/ssrn.1982123

Kristina Minnick (Contact Author)

Bentley University ( email )

175 Forest Street
Waltham, MA 02154
United States

HOME PAGE: http://www.profminnick.com/

Haluk Unal

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2256 (Phone)
301-405 0359 (Fax)

Liu A. Yang

University of Maryland ( email )

College Park
College Park, MD 20742
United States

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