Abstract. We examine the relation between the abnormal compensation acquirer chief executive officer (CEO) obtained and the probability of CEO turnover. Using a sample of 306 acquisitions made by Chinese listed firms during 2006 to 2010, we document a significant positive relation between the abnormal compensation changes and the likelihood of CEO turnover. Though CEO can extract substantial pecuniary benefits from acquisitions, large increases in abnormal compensation is a negative revelation of CEO preference, CEOs who make self-interested acquisitions are significantly more likely to be replaced within 5 years of the M&A completion. Literature review and hypothesisIn the literature on mergers and acquisitions (M&A), the majority of studies concluded that M&A fail to add value to the acquirer (Eckbo (2009) [1] , Bhaumik and Selarka (2012) [2] ). A dominant explanation is the well-known agency conflict between managers and owners, whereby managers undertake value-destroying acquisitions to reap personal benefits at the expense of shareholders (Jensen (1986) [3] ). A natural question is whether bad bidders are fired, Scholten (2005) [4] conclude that being disciplined for making a poor acquisition is more a function of internal discipline than the workings of the takeover market. Lehn and Zhao (2006) [5] find a significant inverse relation between bidder returns and the likelihood of CEO turnover, bad bidders are disciplined by both internal governance and external control mechanisms.Further research indicates that the labor market attaches value to CEO quality information in the context of acquisition decisions. Lehn and Zhao (2006) [5] find that bidders who cancel acquisitions having a negative market response at announcement are rewarded via a lower turnover probability subsequent to deal failure. Jacobsen (2014) [6] focus on a sample of acquisition bids that are withdrawn because the transaction price becomes too expensive, and show that CEOs in this sample are significantly less likely to be fired.Another strand of M&A research reports that CEOs engage in acquisitions experience large increase in compensation despite having poor acquisition performance, which is consistent with the view that managers undertake value-destroying acquisitions to extract personal benefits at shareholder expense. Bliss and Rosen (2001) [7] find that CEO pay generally increases even if mergers cause the acquiring bank's stock price to decline. Grinstein and Hribar (2004) [8] show that M&A bonuses are not related to deal performance. Harford and Li (2007) [9] find that acquirer CEOs are significantly better off due to substantial new stock and option grants following acquisitions, and CEO pay becomes detached from performance after an acquisition. Yim (2013) [10] demonstrate that acquisitions are accompanied by large increases in CEO compensation, which create strong financial incentives for CEOs to pursue acquisitions earlier in their career. Fich et al. (2014) [11] find that beyond compensation for increases in firm size or comp...
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