Executive Compensation and Corporate Acquisition Decisions

Authors

  • Sudip Datta,

  • Mai Iskandar-Datta,

  • Kartik Raman


  • * Datta acknowledges partial support from Robert and Julia Dorn Professorship. We thank Ajai Singh for his comments on an earlier version of the paper. We are especially grateful to Rick Green (the editor) and an anonymous referee for their valuable suggestions. The usual disclaimer applies.

ABSTRACT

By examining how executive compensation structure determines corporate acquisition decisions, we document a strong positive relation between acquiring managers' equity-based compensation (EBC) and stock price performance around and following acquisition announcements. This relation is highly robust when we control for acquisition mode (mergers), means of payment, managerial ownership, and previous option grants. Compared to low EBC managers, high EBC managers pay lower acquisition premiums, acquire targets with higher growth opportunities, and make acquisitions engendering larger increases in firm risk. EBC significantly explains postacquisition stock price performance even after controlling for acquisition mode, means of payment, and “glamour” versus “value” acquirers.

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