Abstract
Do merger bonuses to target CEOs facilitate a wealth transfer from target to acquirer shareholders? We test this hypothesis against an alternative that bonuses enable a useful contractual revision in compensation contracts when takeovers generate small synergies. When target CEOs get a merger bonus, acquirers pay lower premiums, but they also typically get less in the form of low synergies. Moreover, both stock and accounting returns to the acquirers are lower on average in deals with target CEO bonuses. These results support the contractual revision alternative. Nevertheless, wealth transfer occurs when merger bonuses are present in deals where targets exhibit high pre-takeover abnormal accruals or are subject to SEC enforcement actions.
Highlights
In this paper we consider a question often asked in the mergers and acquisitions (M&A) literature: whether eleventh hour extra benefits to target CEOs are explained by a rent-extraction agency problem, with target CEOs sacrificing merger premiums for personal gain.1 we study whether a merger bonus, a particular acquisition-related benefit often paid to target CEOs during takeover deals, generates a transfer of wealth from target shareholders to acquirer shareholders.We propose and evaluate an alternative to the wealth transfer view, which we refer to as the contractual revision hypothesis
We focus on how five different acquisition characteristics are associated with merger bonuses: (1) the premium offered to targets, (2) the total synergy created by the deals, (3) the acquirer M&A announcement returns in the transactions, (4) the post-acquisition accounting performance of the merged firms, and (5) the division of merger gains
In this paper we argue that, in partially unobservable ways related to expected synergies, expected lost wages and the CEO’s utility function, merger bonuses are used to align target CEOs’ incentives with those of their shareholders
Summary
URLs from City Research Online may be freely distributed and linked to. Title and full bibliographic details are credited, a hyperlink and/or URL is given for the original metadata page and the content is not changed in any way. When target CEOs get a merger bonus, acquirers pay lower premiums, but they typically get less in the form of low synergies. Both stock and accounting returns to the acquirers are lower on average in deals with target CEO bonuses. These results support the contractual revision alternative.
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