Pay increase may not be a strong incentive for undertaking acquisitions

Swarnodeep HomRoy ()

No 66910750, Working Papers from Lancaster University Management School, Economics Department

Abstract: A large body of literature suggests that CEOs have misaligned incentives to undertake acquisitions in an attempt to increase their pay. This paper shows that the likelihood of post-acquisition CEO turnover can act as a constraint on such incentives. The acquisition premium in pay decreases by 50% if the likelihood of post-acquisition turnover is controlled for. This suggests a significant survivor bias in previous estimates of acquisition premium. Given a smaller pay premium for undertaking acquisitions and non-zero risk of dismissal, a risk-averse agent may not have strong incentives to undertake an acquisition for the marginal pay increase. The likelihood of dismissal seems to carry stronger incentive effects than post-acquisition pay increase.

Keywords: Agency problem; mergers and acquisitions; CEO pay; Severance (search for similar items in EconPapers)
JEL-codes: G34 J31 J33 M52 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-cfn, nep-cta, nep-hrm and nep-lma
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Persistent link: https://EconPapers.repec.org/RePEc:lan:wpaper:66910750

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