Executive Compensation and Corporate Acquisition Decisions

Abstract

By examining how executive compensation structure determines corporate acquisition decisions, we document a strong positive relation between acquiring managers' equity-based compensation (EBC) and stock price performance around and following acquisition announcements. This relation is highly robust when we control for acquisition mode (mergers), means of payment, managerial ownership, and previous option grants. Compared to low EBC managers, high EBC managers pay lower acquisition premiums, acquire targets with higher growth opportunities, and make acquisitions engendering larger increases in firm risk. EBC significantly explains post-acquisition stock price performance even after controlling for acquisition mode, means of payment, and "glamour" versus "value" acquirers.

Keywords: Executive compensation, corporate acquisitions

JEL Classification: G3