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Pay for Performance? CEO Compensation and Acquirer Returns in BHCs

Kristina Minnick, Haluk Unal and Liu Yang
The Review of Financial Studies
Vol. 24, No. 2 (February 2011), pp. 439-472
Stable URL: http://www.jstor.org/stable/40985854
Page Count: 34
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Pay for Performance? CEO Compensation and Acquirer Returns in BHCs
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Abstract

We examine how managerial incentives affect acquisition decisions in the banking industry. We find that higher pay-for-performance sensitivity (PPS) leads to value-enhancing acquisitions. Banks whose CEOs have higher PPS have significantly better abnormal stock returns around the time of the acquisition announcements. On average, acquirers in the high-PPS group outperform their counterparts in the low-PPS group by 1.4% in a three-day window around the announcement. Higher PPS helps reduce the incentives for making value-destroying acquisitions, while at the same time promotes value-enhancing acquisitions. The positive market reaction can be rationalized by post-merger performance. Following acquisitions, banks with higher PPS experience greater improvements in their operating performance. We show that the effect of PPS is mainly evident in small and medium-sized banks, but is not present in large banks.

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