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Stock Performance or Entrenchment? The Effects of Mergers and Acquisitions on CEO Compensation

56 Pages Posted: 20 Aug 2012  

Praveen Kumar

University of Houston - Department of Finance

Liang-wei Kuo

National Chung Cheng University - Department of Finance

Latha Ramchand

University of Houston

Date Written: July 8, 2012

Abstract

Using a large sample of U.S. acquiring and non-acquiring firms and covering a broad sample of transactions, we examine the effects of mergers and acquisitions (M&A) on CEO compensation during 1993-2006, a period of intense M&A activity. We alleviate endogeneity concerns through dynamic panel data estimation, propensity score matching, and using a natural experiment of exogenous accounting regulatory changes in 2001 that significantly affected the benefits of stock-financed acquisitions. The level of M&A activity ceteris paribus has a significant and positive effect on CEOs' equity-based compensation. But the positive impact of M&A on compensation occurs through primarily stock-financed deals, and there is a positive interaction in the influence of recent stock returns and M&A activity on CEO compensation. However, the usual measures of CEO entrenchment and power do not significantly enhance the effects of M&A. Our analysis supports the view that rent-seeking CEOs use strong recent performance of their firm's stock to pursue stock-financed acquisitions that also positively impact their equity-based compensation.

Keywords: Executive compensation, Mergers and Acquisitions, Entrenchment, Stock Performance

JEL Classification: G30, G34, J33, M12

Suggested Citation

Kumar, Praveen and Kuo, Liang-wei and Ramchand, Latha, Stock Performance or Entrenchment? The Effects of Mergers and Acquisitions on CEO Compensation (July 8, 2012). Available at SSRN: https://ssrn.com/abstract=2132964 or http://dx.doi.org/10.2139/ssrn.2132964

Praveen Kumar (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States
713-743-4770 (Phone)
713-743-4789 (Fax)

Liang-wei Kuo

National Chung Cheng University - Department of Finance ( email )

Chia-Yi, Taiwan 621
Taiwan

Latha Ramchand

University of Houston ( email )

Houston, TX 77204
United States
713-743-4769 (Phone)

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