Managerial Risk Taking Incentives And Merger Decisions

We provide evidence concerning the effect of managerial risk-taking incentives on merger and acquisition (M&A) decisions and outcomes for different types of mergers: vertical, horizontal, and diversifying. Using chief executive officer (CEO) relative inside leverage to proxy for the incentives of risk-averse managers, we find that CEOs with higher inside leverage are more likely to engage in vertical mergers, and those mergers generate lower announcement returns for shareholders. This effect of CEO relative inside leverage on returns for shareholders in vertical acquisitions is more pronounced when the acquirer has a higher degree of informational opacity, weak governance, and excess cash.

This thesis examines the impact of executive compensation on the quality of corporate acquisition decisions. A number of different issues are empirically investigated. The analysis begins with the examination of the relation between the incentives managers are provided with via their compensation contracts and the riskiness of mergers and acquisitions (M&As) investigating whether this relation is affected by the passage of the Sarbanes-Oxley Act (SOX) in 2002. The study then focuses on the performance of acquiring firms exploring how and whether managerial incentives can induce value-increasing acquisitions conditional on the intensity of M&A activity. The final part of the empirical analysis examines whether the legal status of the target firm has any implications for the effectiveness of incentive compensation to mitigate managerial risk-aversion and increase shareholder value. The thesis contributes both to academic literature and to practice by identifying areas of inefficiencies of equity-based compensation contracts to mitigate agency costs. More specifically, new evidence is provided on the effectiveness of incentive compensation to induce risk-taking activity under the impact of stricter regulation. While compensation-related incentives are positively associated with the riskiness of acquisition decisions before 2002, managers have become considerably less responsive to such incentives after the enactment of SOX. Moreover, although incentive compensation can improve deal performance and overcome adverse selection concerns by inducing managers to acquire when it is optimal to do, it is not related to value-increasing decisions when acquisitions are initiated during periods of merger waves. It is further found that equity-based compensation can be rendered ineffective to mitigate agency costs when a publicly listed firm is acquired. Given these inefficiencies, a number of recommendations are made for the improvement of the design of executive compensation contracts that could provide valuable guidelines to remuneration committees to reduce excessive compensation costs and benefit shareholders.

We provide evidence that there has been a fundamental change in the relationship between managerial risk taking incentives and firm risk after 2002, a period characterized by significant regulatory changes concerning executive compensation practices in public corporations. A consequence of the regulatory changes is a drop in CEO stock option grants, translated into significantly lower risk-taking incentives. We show that firms with different risk profiles have responded to regulatory changes differently. Riskier firms decreased the stock option grants, thus risk-taking incentives to their CEOs the most. Yet, the changes in risk-taking incentives have not been accompanied by changes in firm risk. As a result, the relationship between managerial risk-taking incentives and firm risk becomes negative in the post-regulatory era.

Several studies in the finance literature (and other fields) focus on how compensation contracts of CEOs shape incentives and affect risk-taking behaviour. We examine how CEOs with varying risk appetites approach merger and acquisition (M&A) deals differently due to incentives driven by their compensation structure. Relying on VEGA, the sensitivity of executive's portfolio to a one percent change in volatility of stock returns, we document that acquirers and targets behave differently vis-à-vis their compensation. We show that a longer time to completion is related to the target VEGA (and not bidder VEGA). We also find that a more risk-taking CEO (as encouraged by VEGA) selling his firm would delay completing a deal by a significant three weeks. We conjecture that target CEOs choose to delay deal completion to look for better bids that tally their need to change their portfolio of company holdings. Next, we link executive compensation, mergers and acquisitions, and environmental, social and governance in one framework that produces new insights into how CEO's incentives yield sub-optimal investment decisions. Our sample consists of 1,280 mergers (M&A) from the period of 1993-2018 and uses the CEO's wealth sensitivity to stock price volatility (VEGA) as a proxy for risk-taking behaviour. We establish that there is a shift in the relation between CSR rating and cumulative abnormal announcement returns of M&As deals. After 2008, the market for corporate control no longer rewards more commitment to CSR activities. We examine the performance of our sample of mergers in comparison with that of a matched sample of non-bidding firms vis-à-vis their environmental, social and governance (ESG) profiles over the long term. Our results indicate that more CSR commitment does not translate into better long-term returns for shareholders and stakeholders if the firms participate in M&As. Moreover, we investigate how the bidder and target CSR ratings, as well as management risk-taking incentives (proxied by VEGA), affect deals total synergy estimated around the announcement day. Our results show that firms with lower CSR ratings yield more synergy gains, which are not related to both bidder and target risk-taking incentives. Finally, we provide new evidence related to the debate whether corporate social responsibility (CSR) strategies intrinsically benefit organizations and contribute to wealth creation after controlling for CEO compensation. We utilize a sample of M&A deals spanning the period 1993 to 2018 of target firms with different CSR ratings and investigate the effect of CEOs' executive compensation driven incentives. Our main finding is that Low CSR firms becoming targets of M&A contests in the subperiod post-2008 record the highest cumulative average abnormal returns (compared to High CSR over the same period and other subsamples). We report that Low CSR firms with High VEGA target CEOs specifically perform better in corporate control contests in later years. We justify this as Low CSR firms are characterized by lower governance and more agency costs where management seeks benefit its own interests instead of being considerate for the stakeholders at large.

The Handbook of the Economics of Corporate Governance, Volume One, covers all issues important to economists. It is organized around fundamental principles, whereas multidisciplinary books on corporate governance often concentrate on specific topics. Specific topics include Relevant Theory and Methods, Organizational Economic Models as They Pertain to Governance, Managerial Career Concerns, Assessment & Monitoring, and Signal Jamming, The Institutions and Practice of Governance, The Law and Economics of Governance, Takeovers, Buyouts, and the Market for Control, Executive Compensation, Dominant Shareholders, and more. Providing excellent overviews and summaries of extant research, this book presents advanced students in graduate programs with details and perspectives that other books overlook. Concentrates on underlying principles that change little, even as the empirical literature moves on Helps readers see corporate governance systems as interrelated or even intertwined external (country-level) and internal (firm-level) forces Reviews the methodological tools of the field (theory and empirical), the most relevant models, and the field’s substantive findings, all of which help point the way forward

Promoting a comparative perspective, this comprehensive Research Handbook aids in the understanding of alternative finance and its values in a global setting. Readers are encouraged to view alternative finance through the lens of economic mechanisms rather than terminology.

In Great Minds In Management Ken G. Smith and Michael A. Hitt have brought together some of the most influential and original thinkers in management. Their contributions to this volume not only outline their landmark contributions to management theory, but also reflect on the process of theory development, presenting their own personal accounts of the gestation of these theories.The result is not only an ambitious and original panorama of the key ideas in management theory presented by their originators, but also a unique collection of reflections on the process of theory development, an area which to date little has been written about by those who have actually had experience of building theory.In their concluding chapter, Ken G. Smith and Michael A. Hitt draw together some common themes about the development of management theory over the last half a century, and suggest some of the conclusions to be drawn about how theory comes into being.

The FactSet Mergerstat Review is the cornerstone of any mergers and acquisitions library. This must-have resource delivers comprehensive rosters, data and statistics on merger and acquisition (M&A) transactions that involve U.S. companies, including privately held, publicly traded and cross-border transactions, and also lists unit divestitures, management buyouts, and certain asset sales.

The company is under-performing, its share price is trailing, and the CEO gets...a multi-million-dollar raise. This story is familiar, for good reason: as this book clearly demonstrates, structural flaws in corporate governance have produced widespread distortions in executive pay. Pay without Performance presents a disconcerting portrait of managers' influence over their own pay--and of a governance system that must fundamentally change if firms are to be managed in the interest of shareholders. Lucian Bebchuk and Jesse Fried demonstrate that corporate boards have persistently failed to negotiate at arm's length with the executives they are meant to oversee. They give a richly detailed account of how pay practices--from option plans to retirement benefits--have decoupled compensation from performance and have camouflaged both the amount and performance-insensitivity of pay. Executives' unwonted influence over their compensation has hurt shareholders by increasing pay levels and, even more importantly, by leading to practices that dilute and distort managers' incentives. This book identifies basic problems with our current reliance on boards as guardians of shareholder interests. And the solution, the authors argue, is not merely to make these boards more independent of executives as recent reforms attempt to do. Rather, boards should also be made more dependent on shareholders by eliminating the arrangements that entrench directors and insulate them from their shareholders. A powerful critique of executive compensation and corporate governance, Pay without Performance points the way to restoring corporate integrity and improving corporate performance.

In this major reference work, top scholars in the field of strategic management present major ideas and theories in the field drawing on their own research and special expertise. Offers complete coverage of the field of strategic management. Incorporates new ideas on strategy topics from leading scholars in the field. Edited by three of the World's leading management academics.