Tuesday, August 7, 2012
Becher, Juergens, and Vogel have a paper, Do Acquirer CEO Incentives Impact Mergers?, examining the effect of CEO stock ownership and stock options on CEO acquisition decisions. One observation, stock ownership matters. CEOs with large amounts of stock are less likely to pursue value reducing acquisitions. Stock options, on the other hand, aren't as good at incentivizing value enhancing acquisitions. More and more the evidence continues to pile up across a number of governance areas - stock options aren't all they were hoped to be incentive-wise.
Abstract: This paper examines the mechanisms by which CEOs are incentivized and their impact on merger decisions. We argue that CEO ownership and incentive-based (option) holdings are not interchangeable and have differing effects on the choice to undertake a merger, the structure of mergers conditional on a firm undertaking a merger, and ultimately the performance of a deal. Results suggest that CEO ownership aligns incentives, enabling CEOs to make decisions around mergers that maximize shareholder value. CEOs with higher levels of ownership are less likely to take on mergers or hire advisors, more likely to use cash financing, pay lower premiums, and have better post-merger performance. CEO incentive-based holdings on the other hand are associated with higher incidence of undertaking a merger or hiring an advisor, lower probability of using cash financing, and pay higher premiums. In some tests, increased incentive-based wealth leads to lower post-merger performance. These results suggest that CEOs with high option holdings may be motivated more by agency conflicts than acting in shareholder interests.