IV. Empirical Results
This study consists of three main regression results for previous estimation models. Firstly, this study examines the CEO pay-performance sensitivities, including bidders‟ post-acquisition stock performance. And the second model considering three bid characteristics in panel data regressions. Cash payment, the use of advisor, and relative acquisition size are the factors that may affect CEOs pay after acquisitions. The final part in this section discusses the corporate governance role in compensating CEOs after an acquisition. This study employs G-index to proxy the corporate governance factor and to investigate how anti-takeover provisions affect managers‟ post-acquisition payment.
1. Changes in CEO Pay-Performance Sensitivity after an Acquisition
The first factor examined is bidders‟ post-acquisition performance. Since there is no reason to believe that compensation will be symmetrically set for positive and negative performance, I include the dummy variables to distinguish the relation between CEO wealth and firm performance. In addition, the status of acquisition also has different impacts on CEO incentives. Whether an acquisition is successful or is withdrawn may affect the policy or composition of CEO compensation. Thus Table 4 presents the results of the equation (1).
In Table 4, the first column has the time fixed effect and the second column includes the industry fixed effect, while the third column has both two-way fixed effects. As the fixed effect increases, the adjusted R square reaches 0.34 from 0.28, which symbolizes the increase of explanatory power. Across the three models, sales and salegrow are positively and significantly related to executive
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compensation. This corresponds to agency theory that the level of CEO pay should be an increasing function of firm performance. Firms with larger sales and higher potential to grow are inclined to offer higher compensation for exceptional managers. Further, to investigate the coefficient of return variables, the result shows that CEO pay is more strongly related to negative returns rather than positive returns. Thus CEOs pay is more likely to be lowered after poor returns.
This is line with our intuitive that CEOs will be penalized for poor performance.
The result also matches the hypothesis 1 that acquiring CEOs‟ compensation is aligned with firm performance.
However, the negative coefficient on the interaction of negative post-acquisition stock returns for successful deals ( ) indicates that for successful cases, the acquiring CEO can earn more even the firm suffers from negative returns. For successful cases, both the positive return and negative return significantly contributes to CEO pays, which can be regarded as the firms award their CEOs for achieve an acquisition goal successfully. Nevertheless, the interaction terms in withdrawn cases do not show significant result compared to successful deals.
---Insert Table 4 Here---
2. Bid Characteristics and CEO Pay after the Acquisition
The above result shows that the status of acquisition and the post-acquisition firm performance has impact on CEO compensation. To further investigate how other factors may influence CEO pay under the merge situations, this study employs bid characteristics to examine the sensitivity of CEO post-acquisition compensation. Three bid characteristics included are Cash, the Use of Advisor, and Relative Acquisition Size. To examine whether the interactions have any effect on compensation and wealth changes, equation 2 to 4 are constructed to undertake panel data regression. In particular, this study also introduces the industry and year fixed effects to prevent fluctuations. Table 5 summarizes all the regression result of equation 2 to 4.
As in the above section, the following regression also includes the interaction term to examine the differences between successful deals and withdrawn cases.
First, the result of Cash regression model shows that no matter in successful or
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withdrawn cases, the CEO compensation is negatively affected according to the negative coefficient of the interaction terms (SucAcq*Cash and WithAcq*Cash).
Although the result is not very significant, it still provides the direction of what will happen to CEO pay if the acquiror decides to conduct a 100% cash acquisition program. The negative relation between cash acquisition and CEO pay may result from the fund disgorge effect. If the firm conducts a cash acquisition, then it needs much fund to pay, which may result in unpleasant decline in CEO pay. This corresponds to hypothesis 3.1 that cash payment has negative impact on CEOs payment. However, the acquiror firm may compensate their CEO in another way, for example, the employee options. Thus the decomposition of these CEO pay can help to declare the changes in CEO pay after a cash acquisition.
Next, the advisor indicator variable presents a strongly positive relation with CEO pay, which means that the use of advisor enhances CEO‟s compensation.
The possible explanation is that advisor companies provide sufficient and professional services during the dealing period, which also intensify the confidence of the acquiring firm to make a good deal. This confidence may become the trigger of paying more incentives to CEO. No matter the outcome is successfully acquired or not, the CEO will be compensated from the adoption of advisors. Hypothesis 3.2 that regards advisor as positive factor of CEOs payment is thus accepted.
The third bid characteristic model is to examine the RelativeAcqSize factor. In Table 4, the significantly negative coefficient shows that the deal size indeed have impact on CEO pay. As the importance of the deal increases, the supplanting effect becomes more serious. Relatively larger deals are more likely to be withdrawn, consistent with the evidence reported by Luo(2005) and Masulis, Wang et al. (2009). The acquiror needs to offer sufficient fund to complete the deal but in the meanwhile the acquiring CEO may receive fewer incentives due to the short of fund. To further investigate the interaction term, the successful deals with larger relative acquisition size are more likely to decrease their CEO pay, while the withdrawn cases do not suffer the same consequence. Because the successfully acquisition results in substantial cost after the acquisition, the impact on CEO pay is more strong compared to the withdrawn deals. Hypothesis 3.3 that relative deal size is negatively related to CEO‟s compensation is partly accepted in
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the situation of successful deals.
---Insert Table 5 Here---
3. Anti-takeover Provisions and Post-Acquisition Pay-For-Performance
The final part of this section discusses the role of corporate governance in CEOs compensation subsequent to acquisitions. As previously addressed, this study employs Gumpers, Ishii, and Metrick‟s G-index as the proxy of corporate governance effect and construct equation 5 and 6 to examine the role of corporate governance. Equation 5 includes only the G-index value and the interaction effect between the status of bid and G-index. Equation 6 adds positive (negative) return interaction terms for further investigation.
Since the G-index counts for the power of shareholder, the higher G-index value implies that the managers can dominate more resources, and they may even treat themselves with more incentives. From hypothesis 4, in post-acquisition period, CEOs from higher G-index firms are more likely to earn much compensation due to the lack of strong supervising power. However, Masulis, Wang, and Xie(2007) suggest that the G-index is related to stockholder reaction of merger announcements, with higher G-index firms suffering larger losses on the announcement of a takeover attempt. Harford et al. (2008) also shows that firms with weaker corporate governance have lower cash holdings. Though CEOs in firms with higher G-index have more power to raise their own payoff, they may face fund shortage problem when their companies are suffering large losses after an acquisition.
Table 6 summarizes the result of estimation models considering G-index. Model 1, the first column, includes only G-index, without interaction term. It indicates a negative coefficient on G-index variable. This is contrast to hypothesis 4 that CEOs earn more if the company has higher G-index. However, this corresponds to the previous literature that firms with higher G-index may suffer large losses from acquisition announcement, and thus have negative impact on CEOs compensation.
However, to further check the model 2, the withdrawn deals have no negative coefficient in G-index interaction term as in successful cases. Since bidding firms with weak corporate governance are not encountering large losses due to the
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withdrawn announcement, their CEOs are also prevented from compensation declines. When it comes to the relation between return and CEO compensation considering G-index, model 4 shows a complete result. A significant and positive coefficient in SucAcq*NegRet*GIndex implies that the shareholders‟ role is more important in the acquisitions that are successfully completed but with poor performance. In this situation, CEOs can earn more if the firm has lower G-index, that is, shareholders have weak supervising power.
--- Insert Table 6 Here---