Contractual Revisions in Compensation: Evidence from Merger Bonuses to Target CEOs
63 Pages Posted: 2 Sep 2012 Last revised: 17 Dec 2015
Date Written: December 8, 2015
Do merger bonuses to target CEOs facilitate a wealth transfer from target to acquirer shareholders? We test this hypothesis against an alternative that bonuses enable a useful contractual revision in compensation contracts when takeovers generate small synergies. When target CEOs get a merger bonus, acquirers pay lower premiums, but they also typically get less in the form of low synergies. Moreover, both stock and accounting returns to the acquirers are lower on average in deals with target CEO bonuses. These results support the contractual revision alternative. Nevertheless, wealth transfer occurs when merger bonuses are present in deals where targets exhibit high pre-takeover abnormal accruals or are subject to SEC enforcement actions.
Keywords: Merger bonus; Acquisitions; Synergies; Wealth transfer; Abnormal accruals; SEC enforcement actions
JEL Classification: G30, G34, J33
Suggested Citation: Suggested Citation