That’s one of the unknowables. Am I doing it for purposes of vanity or because of my obligation to the shareholders?
Oracle (ORCL) founder Larry Ellison
There is anecdotal evidence suggesting that some CEOs receive lucrative compensation for acquiring other firms. In spite of large compensation, prior research shows that shareholders of acquiring firms do not typically profit from these deals (Hughes, 1989). For example, Jensen and Ruback (1983) cite studies that find no positive announcement returns to acquiring firms in merger deals. The literature shows that acquiring firms are on average rewarded with higher absolute compensation following acquisition (Khorana and Zenner 1998; Bliss and Rosen 2001; Anderson et al. 2004; Grinstein and Hribar 2004; Girma et al. 2006; Harford and Li 2007). The compensation of these deals consequently may influence CEO decisions to do more deals in order to get a better compensation.
There could be several reasons why CEO compensation could have a possible effect on M&A deals. First, lower salary may give more incentive to compete, which can result in increased number of deals. This could be partly explained by tournament theory in which contestants in the labor market are paid prizes dependant on the rank order of the contestants (Lazear and Rosen, 1981). If this holds true in higher levels of management, CEOs could try to increase their compensation as in a tournament where prizes are fixed in advance and tournament participants expend effort to increase the likelihood of winning a prize where what matters is not the absolute level of performance, but how well one does in relation to other competitors (Conyon et al., 2001).
Second explanation to this could be CEO bonuses which typically depend on firm performance characteristics. Bonuses may incentivize CEOs to achieve better accounting targets which usually are better than expected sales or profit of the company. However, in a survey done by Grinstein and Hribar (2008), it was found that 39% of large acquiring firms in U.S. between 1993 and 1999 cited the completion of the deal as a reason for rewarding their CEOs. Moreover, bonuses related to M&A deals are larger when the deals are larger and when the deal takes longer to complete.
In this paper, we analyze whether whether CEO compensation such as salary or bonus affect the number of M&A deals CEO makes. Specifically, we examine whether CEOs are more likely to do more deals if their salary is lower or their bonuses are expected to be larger. The merger and acquisition setting is particularly attractive for studying compensation and age effect on the number of deals since the data allows to look at these effects from a purely behavioral perspective. In particular, the number of deals performed by CEO is observable from merged CEO and merger and acquisition datasets, allowing us to gather better insights on a behavioral level.
Our key conjecture is that CEOs with lower salaries will perform a larger number of deals. In addition, this effect may be stronger among CEOs of smaller companies since making a firm larger by acquisition could increase the compensation of an existing CEO, regardless of whether or not the acquisition creates value. We also posit that CEO bonus might have positive effect on the number of deals performed.
We test our conjectures using a dataset that contains individual CEO compensation data in the To measure the number of deals we use merger and acquisition dataset and pick out deals that are associated with a specific CEO described in our current dataset.
One of our key findings is that lower compensated CEOs [insert finding: perform less/more deals]. Moreover, we find that these effects are stronger [insert finding: larger/smaller firms]. [additional findings].
These empirical findings contribute to a growing literature in behavioral corporate finance examining the effects of CEO attributes on the performance of the firm. We demonstrate that CEO compensation, such as salary and, can have the potential to influence the number of deals the CEO performs.