Growth-Promoting Bonuses and Mergers and Acquisitions

60 Pages Posted: 9 Apr 2023 Last revised: 22 Apr 2025

See all articles by Tor-Erik Bakke

Tor-Erik Bakke

University of Illinois at Chicago - Department of Finance

Mathias Kronlund

The University of Illinois at Urbana-Champaign; European Corporate Governance Institute (ECGI)

Hamed Mahmudi

University of Delaware - Department of Finance

Aazam Virani

University of Arizona - Department of Finance

Date Written: August 26, 2024

Abstract

One-third of U.S. top executives have bonus incentives that are explicitly tied to the firm's size. We study how such "growth-promoting bonuses" influence firms' mergers and acquisitions (M&A) activities. We find that firms with bonus structures that promote growth are more prone to make acquisitions—especially acquisitions of a scale that help meet the bonus size target. We use shocks to sales from plausibly exogenous exchange-rate changes for exporting firms to identify these effects. Acquisitions by firms with growth-promoting bonuses have significantly lower abnormal returns, destroying value for the acquirers on average. These lower acquirer returns can be attributed to the selection of targets with lower synergies and, to a lesser extent, higher premiums paid. The growth-promoting bonuses tend to be sufficiently large such that—despite negative acquirer returns—the net monetary effect for executives who meet their sales bonus targets with a merger remains significantly positive.

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

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JEL Classification: G32, G35, J23

Suggested Citation

Bakke, Tor-Erik and Kronlund, Mathias and Mahmudi, Hamed and Virani, Aazam, Growth-Promoting Bonuses and Mergers and Acquisitions (August 26, 2024). 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

Tor-Erik Bakke

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
6087707753 (Phone)

HOME PAGE: http://https://sites.google.com/site/tebakke/

Mathias Kronlund

The University of Illinois at Urbana-Champaign ( email )

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Hamed Mahmudi (Contact Author)

University of Delaware - Department of Finance ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

Aazam Virani

University of Arizona - Department of Finance ( email )

McClelland Hall
Tucson, AZ 85721-0108
United States

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