Abstract
We estimate the effect of acquisition performance and acquisition activity on CEO compensation for the full set of CEOs of large public U.S. corporations in the Execucomp database over the period 1992–2016. Most previous work has focused on publicly traded acquisition targets. We focus on the comparison between public and private targets, showing significant differences between the two. One primary finding, based on panel data regressions (using both fixed and random effects) is that the performance of private acquisitions, as measured by abnormal announcement returns, has a statistically significant positive effect of plausible economic magnitude on CEO compensation. Public acquisitions exhibit a smaller positive effect that is statistically insignificant. For both, acquisition activity (number of acquisitions) has a statistically significant positive effect on compensation. Our main results suggest that agency considerations are important for both public and private acquisitions but are more important for public acquisitions.
Highlights
In recent years, CEO compensation has been a major and often controversial subject in the business media and has been an important area of academic study
Based on the theoretical implications of agency theory as it applies to executive compensation, we suggest that agency distortions would be stronger for public acquisitions
As for theoretical foundations for possible different effects of public and private acquisitions, we suggest that the agency-based distortions that would weaken the link between acquisition performance and CEO compensation are stronger for public acquisitions
Summary
We start from the classic observation of Means (1931) that large corporations are subject to a separation of ownership (shareholders) and control (senior executives) that creates potential conflicts of interest. One agency-based possibility proposed by Shleifer and Vishny (1989) is the “management entrenchment” hypothesis that CEOs pursue acquisitions (and other investments) that increase their personal value to the firm and make them harder to replace. The shareholder value hypothesis reduces to the question of how effectively contracts, monitoring, and other tools can mitigate agency problems and other factors to bring incentives of CEOs and other senior executives into alignment with the interests of shareholders. Wright et al (2002) find that the shareholder value effect of acquisition performance on CEO compensation is stronger when the firm’s senior executives are monitored more closely (as measured by independent board members, stock owned by institutions, and other variables). Hypothesis 4 (H4). (Differential acquisition activity hypothesis): The effect of acquisition activity on CEO compensation is stronger for public acquisitions than for private acquisitions
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