IDEAS home Printed from https://ideas.repec.org/p/lan/wpaper/66910750.html
   My bibliography  Save this paper

Pay increase may not be a strong incentive for undertaking acquisitions

Author

Listed:
  • Swarnodeep Homroy

Abstract

A large body of literature suggests that CEOs have misaligned incentives to undertake acquisitions in an attempt to increase their pay. This paper shows that the likelihood of post-acquisition CEO turnover can act as a constraint on such incentives. The acquisition premium in pay decreases by 50% if the likelihood of post-acquisition turnover is controlled for. This suggests a significant survivor bias in previous estimates of acquisition premium. Given a smaller pay premium for undertaking acquisitions and non-zero risk of dismissal, a risk-averse agent may not have strong incentives to undertake an acquisition for the marginal pay increase. The likelihood of dismissal seems to carry stronger incentive effects than post-acquisition pay increase.

Suggested Citation

  • Swarnodeep Homroy, 2014. "Pay increase may not be a strong incentive for undertaking acquisitions," Working Papers 66910750, Lancaster University Management School, Economics Department.
    • Handle: RePEc:lan:wpaper:66910750
    as

    Download full text from publisher

    File URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/PayIncrease.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Kenneth M. Lehn & Mengxin Zhao, 2006. "CEO Turnover after Acquisitions: Are Bad Bidders Fired?," Journal of Finance, American Finance Association, vol. 61(4), pages 1759-1811, August.
    2. Dechow, Patricia M. & Sloan, Richard G., 1991. "Executive incentives and the horizon problem : An empirical investigation," Journal of Accounting and Economics, Elsevier, vol. 14(1), pages 51-89, March.
    3. Xavier Gabaix & Augustin Landier, 2008. "Why has CEO Pay Increased So Much?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(1), pages 49-100.
    4. Anderson, Christopher W. & Becher, David A. & Campbell, Terry II, 2004. "Bank mergers, the market for bank CEOs, and managerial incentives," Journal of Financial Intermediation, Elsevier, vol. 13(1), pages 6-27, January.
    5. Bizjak, John M. & Lemmon, Michael L. & Naveen, Lalitha, 2008. "Does the use of peer groups contribute to higher pay and less efficient compensation?," Journal of Financial Economics, Elsevier, vol. 90(2), pages 152-168, November.
    6. Main, Brian G M & O'Reilly, Charles A, III & Wade, James, 1993. "Top Executive Pay: Tournament or Teamwork?," Journal of Labor Economics, University of Chicago Press, vol. 11(4), pages 606-628, October.
    7. Grinstein, Yaniv & Hribar, Paul, 2004. "CEO compensation and incentives: Evidence from M&A bonuses," Journal of Financial Economics, Elsevier, vol. 73(1), pages 119-143, July.
    8. Singh, Ajit, 1975. "Take-Overs, Economic Natural Selection, and the Theory of the Firm: Evidence from the Postwar United Kingdom Experience," Economic Journal, Royal Economic Society, vol. 85(339), pages 497-515, September.
    9. Pathan, Shams, 2009. "Strong boards, CEO power and bank risk-taking," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1340-1350, July.
    10. Ozkan, Neslihan, 2012. "Do CEOs gain more in foreign acquisitions than domestic acquisitions?," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1122-1138.
    11. Dickerson, Andrew P & Gibson, Heather D & Tsakalotos, Euclid, 1997. "The Impact of Acquisitions on Company Performance: Evidence from a Large Panel of UK Firms," Oxford Economic Papers, Oxford University Press, vol. 49(3), pages 344-361, July.
    12. Paul M. Guest, 2009. "The Impact of Mergers and Acquisitions on Executive Pay in the United Kingdom," Economica, London School of Economics and Political Science, vol. 76(301), pages 149-175, February.
    13. Khorana, Ajay & Zenner, Marc, 1998. "Executive compensation of large acquirors in the 1980s," Journal of Corporate Finance, Elsevier, vol. 4(3), pages 209-240, September.
    14. Elie Matta & Paul W. Beamish, 2008. "The accentuated CEO career horizon problem: evidence from international acquisitions," Post-Print hal-00486653, HAL.
    15. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    16. Sourafel Girma & Steve Thompson & Peter W. Wright, 2006. "The Impact of Merger Activity on Executive Pay in the United Kingdom," Economica, London School of Economics and Political Science, vol. 73(290), pages 321-339, May.
    17. Kevin J. Murphy & Ján Zábojník, 2004. "CEO Pay and Appointments: A Market-Based Explanation for Recent Trends," American Economic Review, American Economic Association, vol. 94(2), pages 192-196, May.
    18. Bebchuk, Lucian A. & Fried, Jesse M., 2003. "Executive Compensation as an Agency Problem," Berkeley Olin Program in Law & Economics, Working Paper Series qt81q3136r, Berkeley Olin Program in Law & Economics.
    19. Lucian Arye Bebchuk & Jesse M. Fried, 2003. "Executive Compensation as an Agency Problem," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 71-92, Summer.
    20. Antia, Murad & Pantzalis, Christos & Park, Jung Chul, 2010. "CEO decision horizon and firm performance: An empirical investigation," Journal of Corporate Finance, Elsevier, vol. 16(3), pages 288-301, June.
    21. Core, John E. & Holthausen, Robert W. & Larcker, David F., 1999. "Corporate governance, chief executive officer compensation, and firm performance," Journal of Financial Economics, Elsevier, vol. 51(3), pages 371-406, March.
    22. Huson, Mark R. & Malatesta, Paul H. & Parrino, Robert, 2004. "Managerial succession and firm performance," Journal of Financial Economics, Elsevier, vol. 74(2), pages 237-275, November.
    23. Sartori, Anne E., 2003. "An Estimator for Some Binary-Outcome Selection Models Without Exclusion Restrictions," Political Analysis, Cambridge University Press, vol. 11(2), pages 111-138, April.
    24. Elie Matta & Paul W. Beamish, 2008. "The accentuated CEO career horizon problem: evidence from international acquisitions," Strategic Management Journal, Wiley Blackwell, vol. 29(7), pages 683-700, July.
    25. Jarrad Harford & Kai Li, 2007. "Decoupling CEO Wealth and Firm Performance: The Case of Acquiring CEOs," Journal of Finance, American Finance Association, vol. 62(2), pages 917-949, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jongmoo Jay Choi & Omer F. Genc & Ming Ju, 2020. "Is an M&A self‐dealing? Evidence on international and domestic acquisitions and CEO compensation," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(9-10), pages 1290-1315, October.
    2. Agyei-Boapeah, Henry & Ntim, Collins G. & Fosu, Samuel, 2019. "Governance structures and the compensation of powerful corporate leaders in financial firms during M&As," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 37(C).
    3. Fich, Eliezer M. & Starks, Laura T. & Yore, Adam S., 2014. "CEO deal-making activities and compensation," Journal of Financial Economics, Elsevier, vol. 114(3), pages 471-492.
    4. Yan Liu & Carol Padgett & Simone Varotto, 2017. "Corporate Governance, Bank Mergers and Executive Compensation," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 22(1), pages 12-29, January.
    5. Amewu, Godfred & Alagidede, Paul, 2019. "Mergers and executive compensation changes: Evidence from African markets," Research in International Business and Finance, Elsevier, vol. 48(C), pages 397-419.
    6. Balafas, Nikolaos & Florackis, Chris, 2014. "CEO compensation and future shareholder returns: Evidence from the London Stock Exchange," Journal of Empirical Finance, Elsevier, vol. 27(C), pages 97-115.
    7. Kräkel, Matthias & Müller, Daniel, 2013. "Bad Mergers Revisited: An Incentive Perspective," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79914, Verein für Socialpolitik / German Economic Association.
    8. Swarnodeep HomRoy, 2016. "Was Adam Smith Right? Evidence of Compensating Differential in CEO Pay," Manchester School, University of Manchester, vol. 84(1), pages 1-24, January.
    9. Paul M. Guest, 2009. "The Impact of Mergers and Acquisitions on Executive Pay in the United Kingdom," Economica, London School of Economics and Political Science, vol. 76(301), pages 149-175, February.
    10. Marquardt, Blair B. & Myers, Brett W. & Niu, Xu, 2018. "Strategic voting and insider ownership," Journal of Corporate Finance, Elsevier, vol. 51(C), pages 50-71.
    11. Yim, Soojin, 2013. "The acquisitiveness of youth: CEO age and acquisition behavior," Journal of Financial Economics, Elsevier, vol. 108(1), pages 250-273.
    12. Dong, Feng & Doukas, John, 2021. "The effect of managers on M&As," Journal of Corporate Finance, Elsevier, vol. 68(C).
    13. Faulkender, Michael & Yang, Jun, 2010. "Inside the black box: The role and composition of compensation peer groups," Journal of Financial Economics, Elsevier, vol. 96(2), pages 257-270, May.
    14. Ralph Sonenshine & Nathan Larson & Michael Cauvel, 2015. "The Effect of Mergers, Divestitures, and Board Composition on CEO Compensation Before and After the Financial Crisis," Working Papers 2015-08, American University, Department of Economics.
    15. Croci, Ettore & Petmezas, Dimitris, 2015. "Do risk-taking incentives induce CEOs to invest? Evidence from acquisitions," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 1-23.
    16. Kräkel, Matthias & Müller, Daniel, 2015. "Merger efficiency and managerial incentives," International Journal of Industrial Organization, Elsevier, vol. 41(C), pages 51-63.
    17. Kräkel, Matthias & Müller, Daniel, 2014. "Merger Performance and Managerial Incentives," Bonn Econ Discussion Papers 02/2014, University of Bonn, Bonn Graduate School of Economics (BGSE).
    18. Qiu, Buhui & Trapkov, Svetoslav & Yakoub, Fadi, 2014. "Do target CEOs trade premiums for personal benefits?," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 23-41.
    19. Matthias Kiefer & Edward Jones & Andrew Adams, 2016. "Principals, Agents and Incomplete Contracts: Are Surrender of Control and Renegotiation the Solution?," CFI Discussion Papers 1603, Centre for Finance and Investment, Heriot Watt University.
    20. Feito-Ruiz, Isabel & Renneboog, Luc, 2017. "Takeovers and (excess) CEO compensation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 50(C), pages 156-181.

    More about this item

    Keywords

    Agency problem; mergers and acquisitions; CEO pay; Severance;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lan:wpaper:66910750. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Giorgio Motta (email available below). General contact details of provider: https://edirc.repec.org/data/delanuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.