Tuesday, July 3, 2007
Paige Parket Ouimet, a professor at the University of Michigan at Ann Arbor - Stephen M. Ross School of Business, has posted to the SSRN a new article entitled: Acquisition Decisions and Target Managerial Incentives. The article is on the important and controversial topic of management incentive payments, and its findings will likely add further ammunition to supporters of these payments (at least in some reasonable measure). Here is the abstract:
We propose that managerial incentives play an important role in acquisition decisions. After a majority acquisition, the stock price of the target is typically delisted and any equity-based incentives for the manager of the target's assets are now likely to be tied to the share price of the merged firm, thus, diluting the incentives of the target's managers. This dilution will be greater, the greater the relative size of the merged firm to the target. We predict firms are less likely to pursue a majority acquisition when the expected costs associated with the dilution to target managerial incentives are high. We test this prediction by comparing majority acquisitions to similar corporate events that do not result in a delisting of the target's stock price, minority acquisitions. We find that acquiring firms are more likely to partake in majority as compared to minority acquisitions when the acquirer is relatively small and the target is relatively large. These results are stronger when 1) the target firm is public, as compared to private, 2) equity-based managerial incentives are relatively more important, and, 3) accounting-based information is less of a substitute for the information in the stock price regarding managerial performance.