Frequent Acquirers and Management Compensation

Abstract

We find significant positive contemporaneous, short-run, and long-run effects of an increase in the acquisition rate on management compensation. The long-run effect of an additional deal completed each year by an average acquirer increases management’s total, equity, and cash compensation by 21 percent, 7 percent, and 22 percent, respectively. Frequent acquirers, on average, pay their management 46 percent higher in total compensation, 55 percent higher in equity-based compensation, and 6 percent higher in cash-based (short-term) compensation, relative to non-frequent acquirers. Frequent acquirers pay higher equity-based compensation than cash-based compensation compared to non-frequent acquirers. Further, the impact of the acquisition rate on management compensation is higher for value-enhancing acquirers relative to value-destroying acquirers. We find a positive bi-directional influence between acquisition frequency and management compensation. Operationally more efficient acquirers are less likely to have a higher acquisition rate. Further, frequent acquisitions do not improve an acquirer’s operational efficiency, possibly due to constant post-acquisition integration challenges. We find a positive bi-directional causality between the total q (firm value) and the acquisition frequency, which may explain a positive association between overvalued stocks and acquisition frequency. A higher market value is likely to associate with higher acquisition frequency that is further likely to be associated with higher management compensation, Further, acquisition rate has a positive impact on the market share. Acquirers with a lower market share are more likely to become frequent acquirers. A causal order appears to exist from a lower market share to a higher acquisition frequency to a higher market value of the firm to higher management compensation. The increase in shareholder value associated with a higher acquisition frequency is not likely due to a gain in the operational efficiency, but morel likely due to an increase in the growth opportunities and market share of the acquirer. We find another causal order from a lower operational efficiency to a higher acquisition rate to a higher market share to higher management compensation. The causal orders may also explain why some studies may find a negative relation between management compensation and firm performance.

Keywords: serial acquirers; management compensation; market power; operational efficiency; growth opportunities; GMM; cross-lagged structural models

JEL Classification: G34, M52, M21