Contractual Revisions in Compensation: Evidence from Merger Bonuses to Target CEOs

63 Pages Posted: 2 Sep 2012 Last revised: 17 Dec 2015

Eliezer M. Fich

Drexel University - Department of Finance

Edward M. Rice

University of Washington - Michael G. Foster School of Business

Anh L. Tran

Cass Business School, City University London

Date Written: December 8, 2015

Abstract

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

Fich, Eliezer M. and Rice, Edward M. and Tran, Anh L., Contractual Revisions in Compensation: Evidence from Merger Bonuses to Target CEOs (December 8, 2015). Journal of Accounting & Economics (JAE), Vol. 61, 2016, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2139732 or http://dx.doi.org/10.2139/ssrn.2139732

Eliezer M. Fich

Drexel University - Department of Finance ( email )

LeBow College of Business
3220 Market Street – 11th Floor
Philadelphia, PA 19104
(215) 895-2304 (Phone)

Edward M. Rice (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Anh L. Tran

Cass Business School, City University London ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44-207-040-5109 (Phone)
+44-207-040-8881 (Fax)

HOME PAGE: http://www.cass.city.ac.uk/experts/A.Tran

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