Growth-Promoting Bonuses and Mergers and Acquisitions

We study how growth-promoting bonuses - bonuses that are explicitly tied to size measures such as sales - impact firms' acquisition activity. Firms whose executives are granted growth-promoting bonuses are more likely to do acquisitions. Acquisitions by such firms tend to destroy value for acquirers, as indicated by lower acquirer announcement returns. Lower acquirer returns appear to be a result of selecting targets with lower synergies and to a lesser extent, higher value transfers to targets. Among firms that grant growth-promoting bonuses, many would have missed their bonus goals without doing an acquisition.

Keywords: Merger and Acquisitions, Executive Compensation, Annual Incentive Plans, Growth-promoting Bonuses

JEL Classification: G32, G35, J23

Suggested Citation: Suggested Citation

Bakke, Tor-Erik and Kronlund, Mathias and Mahmudi, Hamed and Virani, Aazam, Growth-Promoting Bonuses and Mergers and Acquisitions (March 22, 2023). European Corporate Governance Institute – Finance Working Paper No. 906/2023, Available at SSRN: https://ssrn.com/abstract=4396815 or http://dx.doi.org/10.2139/ssrn.4396815