The Dark Side of Executive Compensation Duration: Evidence from Mergers and Acquisitions

Zhi Li and Qiyuan Peng

Journal of Financial and Quantitative Analysis, 2021, vol. 56, issue 8, 2963-2997

Abstract: We find that contrary to popular belief, CEOs with long compensation duration do not make better long-term investment decisions. Using a comprehensive pay duration measure, we find that acquisitions conducted by CEOs with long compensation duration receive more negative announcement returns, and experience significantly worse post-acquisition abnormal operating and stock performance, compared with deals conducted by CEOs with short compensation duration. The negative correlation between compensation duration and mergers and acquisitions (M&A) performance is driven by long-term time-vesting plans, not by performance-vesting plans. The results suggest that extending CEO pay horizons without implementing performance requirements is insufficient to improve managerial long-term investment decisions.

Date: 2021
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