External fairness of executive compensation, institutional investor and M&A premium

Abstract

PurposeThis paper aims to study the impact of external fairness of executive compensation on M&A premium, and examine the moderate role of institutional investors. The high M&A premium is the main factors that induce the huge impairment of listed companies’ goodwill and the plummeting performance. Executives are the decision-makers of M&As, and their decision-making process is inevitably affected by the psychological factors. In recent years, institutional investors have become an important external force that can affect the governance of listed companies.Design/Methodology/ApproachThe authors use M&A data of listed companies from 2008 to 2018 and use OLS regression to test the relationship between executive compensation fairness and M&A premium.FindingsThe results show that the lower the external fairness of executive compensation, the greater the M&A premium. Institutional investors can effectively reduce the impact of external compensation unfairness on M&A premiums. The mechanism tests show that executives' psychological perception of fairness induced by external unfairness reduces their motivation to work and prompts them to use high premium to seek alternative compensation incentives. Further examinations of executive characteristics and corporate characteristics show that the role of external unfairness in executive compensation in driving M&A premiums is more pronounced in companies with longer executive tenure, weaker executive reputation incentives and private property.Originality/ValueThis paper enriches the research on the pre-factors of M&A premiums from the perspective of executives’ psychological perception of fairness, provides evidence that institutional investors play a positive governance role and provides decision-making references for companies to take corresponding measures to reduce M&A premium risks.