Director compensation incentives and acquisition performance

Ismail Lahlou and Patrick Navatte
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Ismail Lahlou: CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique, CREGO - Centre de Recherche en Gestion des Organisations (EA 7317) - Université de Haute-Alsace (UHA) - Université de Haute-Alsace (UHA) Mulhouse - Colmar - UB - Université de Bourgogne - UBFC - Université Bourgogne Franche-Comté [COMUE] - UFC - Université de Franche-Comté - UBFC - Université Bourgogne Franche-Comté [COMUE]

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Abstract: This paper investigates the relation between director compensation structure and shareholder interests in the context of acquisitions. Our evidence suggests that acquirer firms that compensate their directors with a higher proportion of incentive-based compensation have significantly higher stock returns around the announcement. Compared to acquirers in the low equity-based compensation group, acquirers in the high equity-based compensation group outperform by 9.54% in a five-day period surrounding the announcement date. These results hold even after controlling for endogeneity issues. We further find that acquirers with higher equity-based pay exhibit greater improvements in stock price and operating performance in the three years following acquisitions. An increase in director equity-based pay also results in a lower acquisition premium for targets. These results indicate that equity-based compensation provides incentives for directors to make decisions that meet the interests of shareholders.

Keywords: Board of directors; Compensation; Director incentives; Acquisitions; Bargaining power; Agency theory (search for similar items in EconPapers)
Date: 2017-10
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Citations: View citations in EconPapers (6)

Published in International Review of Financial Analysis, 2017, 53, pp.1-11. ⟨10.1016/j.irfa.2017.07.005⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01614572

DOI: 10.1016/j.irfa.2017.07.005

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