Value Creation Around Merger Waves: The Role of Managerial Compensation

Abstract

This paper examines the relation between executive compensation and value creation in merger waves. The sensitivity of CEO wealth to firm risk increases the likelihood of out‐of‐wave merger transactions but has no influence on in‐wave merger frequency. CEOs with compensation linked to firm risk have better out‐of‐wave merger performance in comparison to in‐wave mergers. We also present evidence that cross‐sectional acquirer return dispersion is greater for in‐wave acquisitions. Our results suggest that the underperformance of acquiring firms during merger waves can be attributed in part to ineffective compensation incentives, and appropriate managerial incentives can create value, particularly in non‐wave periods.

Keywords: deal performance, delta, incentive compensation, merger waves, vega

JEL Classification: G31, G34, M12