The Bright Side of Giving Managers Short-Horizon Incentives

Abstract

Managers with short-term incentive horizons are significantly less likely to acquire other firms. When firms with shorter incentive packages make an announcement of an M&A deal, both the short-term and long-term abnormal returns are greater than for firms whose managers have long-horizon incentives. Consistent with the positive abnormal returns, M&As conducted by short-horizon managers exhibit stronger post-M&A accounting-based performance. The results are surprising when viewed against the conventional wisdom that giving managers short-term incentives is suboptimal and imply that short-term incentives can be value increasing for some firms.