In their comprehensive examination of CEO pay, Harford and Li (2007) report that
„CEO‟s wealth rises in step with positive stock performance after a merger‟, and corporate governance plays an important role to „retain the sensitivity of bidding CEOs‟ compensation to poor performance following the acquisition‟. The findings in this study are similar. After collecting acquisition and CEOs‟ compensation data from 1993 to 2006, this study investigate the different triggers that may change CEOs‟
payment after mergers.
First this study examines executive pay-performance sensitivity after an acquisition.
The result finds that CEO‟s payment is more negatively affected if the acquiring firm has negative return after the acquisition. This corresponds to our intuitive that CEO earns less if firm has poor performance. In addition to stock return, this study also divides the deals into two groups according to their status to distinguish the differences between successful and withdrawn transactions. The results indicate that in successful acquisitions, CEOs can earn more payment no matter the firm performance is good or not. CEOs may be compensated for their accomplishment to achieve a successful transaction.
Further, three bid characteristics, cash, advisor, and relative acquisition size, are included to explore the relation between CEOs‟ compensation and the conditions set in a bid. In successful and cash payment deals, CEOs earn less after the transaction.
The possible explanation is that acquiring firms may have fund shortage after purchasing a target with cash, thus have a decline pressure on their CEOs‟
compensation. On the other hand, CEOs in withdrawn and cash payment cases also suffers decreasing payment. It may be regarded that the acquiring firm has insufficient cash to realize the acquisition with cash payment announcement, and this problem may also have negative impact on CEOs‟ compensation.
The use of advisor adds professional assistance for acquiring firms when conducting an acquisition. The regression consequences present that the use of advisors enhances CEOs payment regardless of the status outcomes (successful or withdrawn). Since the adoption of advisors may reflect CEOs decision-making and leading skills, the acquiring firm may also compensate their CEOs for hiring professional advisors.
The last bid characteristics regression result show that relatively larger deals are
23
more likely to be withdrawn. For acquiring firms with greater relative acquisition size and successfully completed a deal, their CEOs suffer payment declines. Since the bidding firm should pay substantial amount for a successful transaction with relatively larger acquisition size, it may face the fund shortage, and thus decrease CEO‟s compensation.
The final discussed subject in this study is the relation between corporate governance and CEO‟s post-acquisition compensation. Consistent with previous literature (Masulis, Wang et al. (2007)), firms with weaker governance suffers losses from acquisition announcement and their CEOs are also more likely to encounter payment declines. In particular, corporate governance is more important in the situation that acquiror completes a successful transaction but with poor post-acquisition performance. CEOs in firms that accomplish successful deals but result in unpleasant performance are prone to earn more when the corporate governance mechanism is weak.
This study documents possible factors that may affect CEOs‟ post-acquisition payment and complements recent researches of executive compensation. However, there are still aspects that are deserved further study. One possible direction is to further investigate withdrawn cases. Since there are few literatures discussing the withdrawn bids, to explore the related factors that arouse a withdrawn deal contributes to making acquisition decisions. Furthermore, current compensation schemes of executives are still inefficient to solve the agency problems. How to align both shareholders‟ and managers‟ rights under different acquisition conditions is always an important issue. Besides, the mechanism to measure corporate governance varies, thus using different measurements for corporate governance proxies are good methods to sophisticate this study.
To summarize, this study enhances not only our understandings of the determinants of executive compensation considering acquisition events, but also highlights the importance of corporate governance in solving agency problems.
24
Table 1: Distribution of Corporate Acquisitions across Time and Industries, 1993-2006.
The sample consists of 3725 successfully completed bid and 252 withdrawn deals with deal value over 1 million U.S. dollar. The sample period is during January 1, 1993 to December 31, 2006.
The acquirors are listed in Mergers and Acquisitions database from Securities Data Company and have executive compensation data in Standard and Poor‟s ExecuComp database. The industry classification follows Fama and French(1997).
Panel A: Distribution By Year
Successful Cases Withdrawn Cases
Year Frequency % Frequency %
1993 136 3.65 10 3.97
1994 203 5.45 12 4.76
1995 224 6.01 18 7.14
1996 265 7.11 21 8.33
1997 277 7.44 19 7.54
1998 311 8.35 16 6.35
1999 328 8.81 32 12.7
2000 314 8.43 45 17.86
2001 256 6.87 19 7.54
2002 267 7.17 10 3.97
2003 286 7.68 14 5.56
2004 276 7.41 14 5.56
2005 306 8.21 11 4.37
2006 276 7.41 11 4.37
Total 3725 100.00 252 100.00
Panel B: Distribution By Industry
Industry Frequency % Frequency %
Agriculture 13 0.35 0 0.00
Aircraft 36 0.97 5 1.98
Almost Nothing 11 0.30 1 0.40
Apparel 51 1.37 4 1.59
Automobiles and Trucks 77 2.07 8 3.17
Banking 135 3.62 6 2.38
Beer & Liquor 2 0.05 0 0.00
Business Services 565 15.17 38 15.08
Business Supplies 51 1.37 0 0.00
Candy & Soda 17 0.46 2 0.79
Chemicals 110 2.95 10 3.97
25
Table 1, Panel B-- Continued
Coal 5 0.13 0 0.00
Communication 91 2.44 10 3.97
Computers 174 4.67 8 3.17
Construction 38 1.02 3 1.19
Construction Materials 84 2.26 5 1.98
Consumer Goods 63 1.69 6 2.38
Defense 20 0.54 3 1.19
Electrical Equipment 19 0.51 2 0.79
Electronic Equipment 352 9.45 12 4.76
Entertainment 13 0.35 0 0.00
Fabricated Products 5 0.13 0 0.00
Food Products 67 1.80 4 1.59
Healthcare 78 2.09 4 1.59
Insurance 124 3.33 7 2.78
Machinery 96 2.58 6 2.38
Measuring and Control Equipment 95 2.55 13 5.16
Medical Equipment 133 3.57 13 5.16
Non-Metallic and Industrial Metal Mining 9 0.24 1 0.40
Personal Services 36 0.97 0 0.00
Petroleum and Natural Gas 209 5.61 8 3.17
Pharmaceutical Products 154 4.13 7 2.78
Precious Metals 7 0.19 0 0.00
Printing and Publishing 45 1.21 1 0.40
Recreation 33 0.89 3 1.19
Restaraunts, Hotels, Motels 59 1.58 6 2.38
Retail 143 3.84 13 5.16
Rubber and Plastic Products 15 0.40 3 1.19
Shipbuilding, Railroad Equipment 1 0.03 0 0.00
Shipping Containers 8 0.21 1 0.40
Steel Works Etc 61 1.64 4 1.59
Textiles 21 0.56 1 0.40
Tobacco Products 2 0.05 1 0.40
Trading 103 2.77 2 0.79
Transportation 55 1.48 9 3.57
Utilities 146 3.92 17 6.75
Wholesale 93 2.50 5 1.98
Total 3725 100.00 252 100.00
26
Table 2: Descriptive Statistics of Acquiring Firms
Panel A presents the summary statistics of the sample as in Table 1, which consists of 3725 successfully completed bid and 252 withdrawn transactions announced between Jan 1, 1993 and Dec 31, 2006. All data are obtained at the year-end either before the announcement year or after the acquisition completion. Variables in firm characteristics and CEO compensation are measured in millions unit. Panel A summarizes the median, 5th and 95th percentile values. Sales is the market value of total sales in year t. Assets is the book value of total assets in year t. SalesGrowth is the change ratio of total sales from year t-1 to t. ROA is the accounting return on assets, calculated as the earnings before interest and taxes to total assets. Return is the annual stock return during the fiscal year. CEO compensation variables include annual Salary and Bonus. Option is the value of options granted in year t. Total Pay is the sum of salary, bonus, other annual compensation, value of restricted stock granted, value of new stock options granted during the year, long-term incentive payouts, and all other compensation. In Panel B, the sample shows the frequency and percentage of cash payment and the use of advisors in both successful and withdrawn samples. Panel C demonstrates the distribution of relative acquisition size. Relative acquisition size is the deal size divided by the market value of the bidder. Panel C uses the extreme quintiles to investigate the variances in different relative deal size.
Panel A: Sample Overview
Successful Deals Withdrawn Deals
Announcement Year-1 Completion Year+1 Announcement Year-1 Completion Year+1
5th Pct Median 95th Pct 5th Pct Median 95th Pct 5th Pct Median 95th Pct 5th Pct Median 95th Pct Firm Characteristics
Sales 107 1145 22956 70 1430 29389 123 1538 25363 0 1809 30251 Assets 139 1402 34369 102 1797 41941 159 1539 37478 0 2063 45894 SalesGrowth -0.162 0.121 0.901 -0.181 0.113 0.641 -0.143 0.118 0.801 -0.266 0.087 0.572 ROA -0.071 0.052 0.169 -0.121 0.043 0.153 -0.033 0.053 0.163 -0.112 0.040 0.142 Return -0.418 0.152 1.263 -0.576 0.071 0.932 -0.419 0.179 1.193 -0.486 0.037 0.872 CEO Compensation
Salary 0.215 0.597 1.200 0.240 0.650 1.300 0.275 0.571 1.283 0.246 0.650 1.275 Bonus 0 0.450 2.769 0 0.367 2.766 0 0.538 3.000 0 0.375 2.701 Option 0 1.027 13.711 0 0.735 13.933 0 0.881 14.534 0 0.585 17.789 Total Pay 0.460 2.652 19.246 0.522 3.175 22.125 0.416 2.728 20.482 0.483 2.994 23.639
27
Table 2 –continued
Panel B: Frequency of Cash and Advisor Indicator Variables.
Successful Deals Withdrawn Deals
Frequency % Frequency %
Cash 1553 44.63% 89 35.32%
Advisor 1303 37.44% 89 35.32%
Panel C: Distribution of Relative Acquisition Size Ratio Quantiles Successful Deals Withdrawn Deals
5% 0.0014 0.0002
50% 0.0395 0.2924
95% 0.4190 1.3559
Mean 0.111 0.2932
28
Table 3: Descriptive Statistics of Acquiring Firm with G-index Data
In panel A, the frequency of acquirors with G-index data shows the distribution in both successful and withdrawn transactions. G-index is constructed by Gumpers, Ishii, and Metrick (2003) to evaluate the antitakeover provisions of companies. G-index is pervasively employed to measure the power between shareholders and managers. Panel B provides the average return of successful and withdrawn deals in different G-index groups. Following previous literatures (Gumpers, Ishii, and Metrick (2003), Core, Guay, and Rusticus(2006)) , High G-index is defined as the value of G-index over 14, and the G-index value under 5 is categorized in Low G-index. Return is the yearly stock return of the company.
Negative (Positive) Return represents the average Negative (Positive) stock return in a year of the acquiring company.
Panel A: Frequency of G-index in the Sample Successful Deals Withdrawn Deals G-index Frequency Percentage Frequency Percentage
2 2 0.1% 0 0.0%
3 10 0.7% 1 1.1%
4 28 1.9% 2 2.2%
5 49 3.3% 1 1.1%
6 90 6.1% 3 3.3%
7 137 9.3% 14 15.4%
8 201 13.6% 16 17.6%
9 232 15.7% 11 12.1%
10 221 15.0% 12 13.2%
11 189 12.8% 7 7.7%
12 135 9.1% 8 8.8%
13 105 7.1% 11 12.1%
14 45 3.0% 2 2.2%
15 19 1.3% 1 1.1%
16 13 0.9% 2 2.2%
17 1 0.1% 0 0.0%
Total 1477 100% 91 100%
Panel B: Aquiror‟s Return in Different G-index Level for Successful and Withdrawn Cases Negative Return Positive Return Return
Successful Deals High G-index -23.18% 34.19% 11.62%
Low G-index -32.98% 55.14% 4.40%
Withdrawn Deals High G-index -18.67% 26.91% 8.24%
Low G-index -0.21% 54.15% 53.94%
29
Table 4: Changes in CEO Pay-Performance Sensitivity after the Acquisition
Table 4 examines the relation between CEOs post-acquisition compensation and firm performance. The data covers the period 1993 through 2006. The dependent variable is the natural log of CEOs total pays.
The control variables include the logarithm of firm sales, yearly growth rate of sales, and accounting return on assets. SucAcq(WithAcq) is an indicator variable equals to one if the bidders undertake a successful (withdrawn) acquisition. Positive Return (Negative Return) is the fiscal year‟s positive (negative) stock return if the return is positive (negative), it is set to 0 otherwise. Interaction terms are denoted by SucAcq* and NegAcq*, and represents the interaction of the acquisition indicator variable and the identified variables. Model 1 is one-way fixed effect model considering time-series effect.
Model 2 represents the control of industry fixed effect. Model 3 combines both time-series and industry-specific fixed effect. *, **, and *** indicate significance at 10%, 5%, and 1%, respectively.
Dependent Variable: CEOs Total Pay (1) (2) (3)
Number of Observation 23383 23383 23383
30
Table 5: Bid Characteristics and CEO Post-Acquisition Pay
This table reports regression results examining the relation between bid characteristics variables and CEOs pay subsequent to acquisitions. Cash is an indicator variable that equals to 1 if the bid uses cash payment. Advisor is also a dummy that examines whether bidders use advisor in an acquisition.
RelativeAcqSize accounts for the deal size divided by the bidders‟ market value. Model 2, 4, and 6 consider the interaction effect of these bid characteristics and the status of acquisition. *, **, and ***
indicate significance at 10%, 5%, and 1%, respectively. All models include industry and time fixed
Number of Observation 23241 23241 23241 23241 23241 23241
31
Table 6: Anti-Takeover Provisions and CEO Post-Acquisition Pay
This table includes GIM(2003)‟s G-index variable as the proxy of corporate governance to examine whether anti-takeover provisions affect CEOs pay after a merge. Model 1 includes G-index to evaluate the relation between CEOs pay and corporate governance. Model 2 adds interaction terms of deal status and G-index. Model 3 shows the interaction effects of firm performance and G-index. Model 4 combine G-index, firm performance, and deal status to investigate the interaction relation. *, **, and
*** indicate significance at 10%, 5%, and 1%, respectively.
Dependent Variable: CEOs Total Pay (1) (2) (3) (4)
32
Table 6 – continued
Dependent Variable: CEOs Total Pay (1) (2) (3) (4)
WithAcq*NegRet*GIndex 0.00125
(0.3309)
Adj R Square 0.2639 0.2633 0.2635 0.2812
Number of Observation 2717 2717 2717 2717
33
Table 7: Changes in the form of CEOs’ Compensation after Acquisitions
Table 7 includes five models to estimate the possible change of CEOs‟ incentive structure after a merger. Model 1 use the natural log of total payment as the dependent variable. Total payment is the sum of salary, bonus, other annual compensation, value of restricted stock granted, value of new stock options granted during the year, long-term incentive payouts, and all other compensation. Through model 2 to model 5 consist of the log of CEOs salary, bonus, option, and other compensation. LnSales is the natural logarithm of firm‟s sales. SalesGrowth represents yearly growth rate of sales for a bidder.
ROA is accounting return on assets. SucAcq(WithAcq) is an indicator variable equals to one if the bidders undertake a successful (withdrawn) acquisition. Positive Return (Negative Return) is the fiscal year‟s positive (negative) stock return if the return is positive (negative), it is set to 0 otherwise.
Interaction terms are denoted by SucAcq* and NegAcq*, and represents the interaction of the acquisition indicator variable and the identified variables. All models employ time-series and industry fixed effect with panel data regressions. *, **, and *** indicate significance at 10%, 5%, and 1%, respectively.
Dependent Variables: (1)TotalPay (2)Salary (3)Bonus (4)Option (5)Other
Intercept
Number of Observation 23383 23383 23383 23383 23383
34
Table 8: Hostile Takeover and Contested Bid
The sample in panel A includes 3725 successful deals and 252 withdrawn takeovers with the announcement date during 1993 to 2006. Hostile Takeover is a bid that the board officially rejects the offer but the acquiror persists with. Contested Bid is the acquisition that the acquirors still have other competitors during the process of bidding. Panel A shows the frequency and percentage of the bid characteristics in the sample. In Panel B, the result is from panel data regression, with the control of fixed firm-level and fixed time-specific effects. Hostile is a dichotomous variable coded 1 when the deal is undertaken unfriendly and 0 otherwise. Contested is a dummy that equals to 1 if the bidders encountering other competitors in the same acquisition, and is set to 0 otherwise. The SucAcq* and WithAcq* represent the interaction effect of the acquisition indicator variables and the identified variables. Model 2 and Model 4 both consist of interaction terms while Model 1 and Model 3 purely include hostile takeover and contested bid dummies. *, **, and *** indicate significance at 10%, 5%, and 1%, respectively.
Panel A: Frequency of Hostile Takeover and Contested Bid
Successful Deals Withdrawn Deals
Frequency % Frequency %
Hostile Takeover 20 0.5369 22 8.7302
Contested Bid 49 1.3154 44 17.4603
35
Table 8—Continued
Panel B: Panel Data Regression Result Dependent Variable:
Number of Observation 23413 23413 23413 23413
36
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