Takeovers and (Excess) CEO Compensation

Abstract

Abstract.We study if a CEO's equity-based compensation affects the expected value generation in takeovers. When the objectives of management and shareholders are more aligned, as proxied by the use of equity-based compensation, more value-maximizing acquisitions are expected. Whereas in widely-held firms the decision power is with the management, in firms with concentrated ownership the decision power may be with major blockholders. This may entail that ownership concentration and equity-based pay are substitutes. We find a strongly positive relation between equity-based compensation and cumulative abnormal announcement returns at takeovers, but this relation is eroded when dominant share blocks are held by corporations, which confirms the substitution effect. Powerful CEOs in companies with weak boards and without actively monitoring shareholders may set their own pay which could lead to excesses. We relate excess pay to how takeover decisions are received by the market, and demonstrate that excess compensation negatively affects the acquirer's stock valuation at a takeover announcement. The market is thus able to identify firms with agency problems and is cautious in its expectations about potential value creation by means of acquisitions.

Shareholder voting in mergers and acquisitions: evidence from the UK

“…We measure Excess Total Comp as the difference between observed and predicted CEO total compensation. The predicted value was obtained from the regression of CEO total compensation against its determinants together with year and industry controls as in (Core, Guay, and Larcker 2008;Feito-Ruiz and Renneboog 2017). CEO total compensation is the log of the sum of cash compensation and equity-linked compensation both measured in £000s at the fiscal year end prior to the announcement of M&As.…”

CEO pay slice and acquisitions in Australia: the role of tournament incentives

“…Similarly, Bebchuk et al (2011) find that the CPS of a firm in their sample (defined as the ratio between CEO compensation and the compensation of the top five executives) is negatively related to the announcement period returns earned by bidders; firms that have a high CPS are more likely to undertake value-destroying acquisitions. Feito-Ruiz and Renneboog (2017) analyse acquisitions conducted by 12 European countries and uncover a negative association between CEO excess remuneration and acquirers' stock valuations at takeover announcements, implying the market's negative assessment of potential value created by these acquisitions. Hasan et al (2020) show that higher CPS (defined as the ratio between CEO compensation and the other executives) acquirers with greater tournament incentives experience lower announcement period returns, which are deemed to be a result of risk-seeking behaviour of their executives.…”

“…Being the chief planners and architects of their firms' overall strategy, CEOs exercise a significant amount of authority in firms' decision-making process (Finkelstein and Hambrick, 1996; Bertrand and Schoar, 2003; Adams et al , 2005; Crossland et al , 2014). They also enjoy the privilege of directly or indirectly setting their compensation packages at substantially higher levels relative to the compensations received by other executives in the firm (Brownstein and Panner, 1992; Feito-Ruiz and Renneboog, 2017). This high compensation received by CEOs relative to other executives is seen as a reward offered to an outstanding individual who has been entrusted with the responsibility of managing the firm under conditions characterised by internal and external uncertainty (Lazear and Rosen, 1981; Murphy and Zábojník, 2004; Edmans and Gabaix, 2009).…”