The Bright Side of Giving Managers Short-Horizon Incentives
45 Pages Posted: 26 Nov 2019 Last revised: 17 Dec 2019
Date Written: December 16, 2019
Managers with short-term incentive horizons are significantly less likely to acquire other firms. When firms with shorter incentive packages make an announcement of an M&A deal, both the short-term and long-term abnormal returns are greater than for firms whose managers have long-horizon incentives. Consistent with the positive abnormal returns, M&As conducted by short-horizon managers exhibit stronger post-M&A accounting-based performance. The results are surprising when viewed against the conventional wisdom that giving managers short-term incentives is suboptimal and imply that short-term incentives can be value increasing for some firms.
Keywords: executive compensation, pay duration, executive incentives, mergers and acquisitions, short-termism
JEL Classification: G34, M12, G14
Suggested Citation: Suggested Citation