Director Compensation Incentives and Acquisition Performance

Abstract

The principal objective of this paper is to investigate the relation between director compensation structure and shareholder interests in the context of acquisitions. Our evidence suggests that the more closely directors' compensation is tied to the firm's stock, the more consistent corporate acquisition decisions are with shareholder interests. Specifically, we find that acquirer firms that compensate their directors with a higher proportion of incentive-based compensation have significantly higher stock returns around the announcement. Compared to acquirers in the low equity-based compensation group, acquirers in the high equity-based compensation group outperform by 0.73% in a five-day period surrounding the announcement date. An increase in director equity-based pay results in a lower probability of value-destroying acquisitions and a lower acquisition premium for targets. We further find that acquirers with higher equity-based pay exhibit greater improvements in stock price and operating performance following acquisitions.