CEO Compensation Changes Following Acquisitions

Abstract

Increases in CEO compensation following acquisitions are unique to stock-financed acquisitions. These compensation increases are driven by increases in equity-based compensation, and are concentrated in riskier acquirers, riskier acquisitions, and in acquirers whose CEOs have low exposure to the stock price. These findings support the Dual Adverse Selection Hypothesis, which posits that acquirers use stock to overcome adverse selection in the target firm, while increasing the equity-based compensation of the acquirer CEO to mitigate adverse selection concerns on the part of target shareholders. We find little support for the hypothesis that acquisition-related increases in CEO compensation are due to entrenched, empire building CEOs.

Keywords: CEO compensation, acquisitions

JEL Classification: G32, G34