Stakeholders’ wealth is created as a result of successful corporate investment decisions. Decisions on mergers and acquisitions represent a group of long term investments that contrast to small private investments. This is why such major investments are especially interesting for the research as they represent relations between the efficiency of the decision taken by management and their incentive. Executive compensation, in its turn, is a tool that aligns the interests of management and shareholders. Previous studies focused on two types of corporate disinvestment decisions as those that have direct relation to executive compensation: liquidations and divestitures. In this article, the authors added more perspectives on what impact executive compensation has on managerial decisions. They also take into account new equity-based compensation that is paid to top five executives as a factor that may influence the decision of acquisition.
The sample of the research includes 1, 719 acquisitions that took place in the U.S. from 1993 to 1998. This period was selected due to the rapid growth of option based executive pay and numerous market takeovers. It was determined that the stock price response to the acquisition was very low. But if one separates firms with high and low EBC, the effect of stock price differs significantly. High EBC invokes positive effects, whereas low EBC acts the opposite way. They also observed that the premium paid in case of high EBC firms is less than the amount paid by low EBC firms. A significant positive relation is also found between the wealth of shareholder of the acquiring firm and the total compensation to the management of the acquiring firm. As for the risk taking, managers of high EBC firms are lucky to get targets that promise high growth, while low EBC firms fail in terms of this. In the long run, the authors found out that firms with high EBC do not underperform, while low EBC firms usually underperform the median matched firm by 23%. Abnormal long-run performance is also significantly better for the firms with high EBC compared to low EBC companies.
All the computations and analyses were represented in 8 Tables, with each of them representing different aspect of functioning of the firm that had gone through a merger of acquisition procedure. Such detailed study of acquisitions from 1993 to 1998 allowed making the conclusion that the higher EBC the company has, the more benefits it can get as a result of the acquisition. The strongest relation was found between EBC paid to acquiring managers and stock price response that followed the announcement of the merger. Low EBC firms do not get as many advantages, and this is reflected in higher costs for the companies. Moreover, they usually have higher risks. The article is important for the efficiency of the corporate acquisition process. It supports the idea that high compensation is important for improvement of the functioning of internal controls. Executive stock option grants represent a sufficient motivation for managers and they are more successful in their value-maximizing decision-making process regarding investments (Datta, Iskandar-Datta, and Raman, 2001).
References
Datta, S., Iskandar-Datta, M., and Raman, K. (2001). Executive Compensation and Corporate Acquisition Decisions. The Journal of Finance, LVI (6), 2299-2336.
