The Dark Side of Executive Compensation Duration: Evidence from Mergers and Acquisitions

Abstract

We find that contrary to popular belief, CEOs with long compensation duration do not make better long-term investment decisions. Using a comprehensive pay duration measure, we find that acquisitions conducted by CEOs with long compensation duration receive more negative announcement returns, and experience significantly worse post-acquisition abnormal operating and stock performance, compared with deals conducted by CEOs with short compensation duration. The negative correlation between compensation duration and M&A performance is driven by long-term time-vesting plans, not by performance-vesting plans. The results suggest that extending CEO pay horizon without implementing performance requirements is insufficient to improve managerial long-term investment decisions.