Abstract
Differences in time horizons of executives and shareholders are potential sources of conflicts between owners and managers which may lead to suboptimal decisions from a shareholder’s perspective. This paper examines whether longer duration of CEO compensation schemes increases quality of merger & acquisition decisions in different institutional settings. Using hand-collected contract design data of 226 non-financial firms from 17 U.S. and European countries executing 457 deals in 2006 and 2010, I calculate the duration of CEO compensation. I find firms that design CEO contracts containing a longer duration of their compensation to execute more successful M&A deals. Furthermore, this general relationship depends on the institutional setting: In a setting with more shareholder protection, impact of duration is weaker. I conclude that longer time horizons of CEO compensation align owner and manager incentives more closely and lead to better long-term investment decisions.
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