Takeovers and (Excess) CEO Compensation

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Abstract

We study if a CEO’s equity-based compensation affects the expected value generation in takeovers. When the objectives of management and shareholders are more aligned, as proxied by the use of equity-based compensation, more value-maximizing acquisitions are expected. Whereas in widely-held firms the decision power is with the management, in firms with concentrated ownership the decision power may be with major blockholders. This may entail that ownership concentration and equity-based pay are substitutes. We find a strongly positive relation between equity-based compensation and cumulative abnormal announcement returns at take-overs, but this relation is eroded when dominant share blocks are held by corporations, which confirms the substitution effect. Powerful CEOs in companies with weak boards and without actively monitoring shareholders may set their own pay which could lead to excesses. We relate excess pay to how takeover decisions are received by the market, and demonstrate that excess compensation negatively affects the acquirer’s stock valuation at a takeover announcement. The market is thus able to identify firms with agency problems and is cautious in its expectations about potential value creation by means of acquisitions.
Original languageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages43
Volume2017-039
Publication statusPublished - 21 Sep 2017

Publication series

NameCentER Discussion Paper
Volume2017-039

Fingerprint

Equity
CEO compensation
Chief executive officer
Shareholders
Blockholders
Ownership concentration
Announcement
Substitute
Value creation
Monitoring
Agency problems
Announcement returns
Expected value
Substitution effect
Concentrated ownership

Keywords

  • equity-based compensation
  • Mergers and acquisitions (M&As)
  • takeover
  • shareholder protection
  • ownership concentration

Cite this

Feito Ruiz, I., & Renneboog, L. (2017). Takeovers and (Excess) CEO Compensation. (CentER Discussion Paper; Vol. 2017-039). Tilburg: CentER, Center for Economic Research.
Feito Ruiz, Isabel ; Renneboog, Luc. / Takeovers and (Excess) CEO Compensation. Tilburg : CentER, Center for Economic Research, 2017. (CentER Discussion Paper).
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Feito Ruiz, I & Renneboog, L 2017 'Takeovers and (Excess) CEO Compensation' CentER Discussion Paper, vol. 2017-039, CentER, Center for Economic Research, Tilburg.

Takeovers and (Excess) CEO Compensation. / Feito Ruiz, Isabel; Renneboog, Luc.

Tilburg : CentER, Center for Economic Research, 2017. (CentER Discussion Paper; Vol. 2017-039).

Research output: Working paperDiscussion paperOther research output

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AB - We study if a CEO’s equity-based compensation affects the expected value generation in takeovers. When the objectives of management and shareholders are more aligned, as proxied by the use of equity-based compensation, more value-maximizing acquisitions are expected. Whereas in widely-held firms the decision power is with the management, in firms with concentrated ownership the decision power may be with major blockholders. This may entail that ownership concentration and equity-based pay are substitutes. We find a strongly positive relation between equity-based compensation and cumulative abnormal announcement returns at take-overs, but this relation is eroded when dominant share blocks are held by corporations, which confirms the substitution effect. Powerful CEOs in companies with weak boards and without actively monitoring shareholders may set their own pay which could lead to excesses. We relate excess pay to how takeover decisions are received by the market, and demonstrate that excess compensation negatively affects the acquirer’s stock valuation at a takeover announcement. The market is thus able to identify firms with agency problems and is cautious in its expectations about potential value creation by means of acquisitions.

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KW - shareholder protection

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Feito Ruiz I, Renneboog L. Takeovers and (Excess) CEO Compensation. Tilburg: CentER, Center for Economic Research. 2017 Sep 21. (CentER Discussion Paper).