In this section, robustness tests are designed to investigate more details between CEO‟s payment and related determinants. First, decomposing CEOs‟ compensation and undertaking panel regressions as in previous sections to examine the pay-performance sensitivities and probable changes of executives‟ compensation structure. Next, to make further research in bid characteristics, this study introduces two new indicator variables: Hostile and Contested to investigate whether CEO‟s compensation is affected by a hostile takeover or a competitive bid.
1. Decomposition of CEOs‟ Compensation
For better understanding of CEOs‟ incentives after a merger, this section decomposes managers‟ compensation into salary, bonus, options, and other payments and conduct panel data regressions by using the natural log of CEOs‟
incentives as the dependent variables.
---Insert Table 7 Here---
In Table 7, model 2 to model 5 present the estimation result. In addition, this section also uses the percentage change of total payment as the dependent variable.
However the unreported result shows that the explanatory power is too poor and no significant impact exist. The first column in Table 7 reviews the regression result from previous section, which uses the logarithm of CEO‟s total compensation as the response variable. To compare the explanatory power, Model 4(Option) has the highest adjusted R squares, which is nearly 0.4, where Model
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5(Other Compensation) has lowest explanatory power. Next, the coefficient of LnSales in each model is significant and positive, which is similar to the regression result of total payment.
Companies with larger sales are willing to compensate their CEOs in many payment forms. The ROA also shows significantly positive relation with bonus and options. This corresponds to previous literatures (Lewellen et al.(1987), Smith and Watt (1992), Gaver and Gaver(1993), Mehran(1995)) that firms with larger growth opportunities tend to pay more stock-based compensation to their managers for the purpose of interests alignment. In successful deals, CEOs receive positive but not significant excess payment in all forms. However, in withdrawn cases, CEOs earn less option awards. To check the firm performance variables, the result reports that negative returns destroy CEOs‟ salary, bonus, option, and total payment as described in the previous section. That is, managers suffer incentive declines if firms perform poorly. Moreover, the firms that completed successful deals and with positive return raise their CEOs‟ bonus and options. The use of equity-based compensation is aimed to inspire managers to work hard for firm performance and future awards. In withdrawn cases, CEOs receive lower salary and bonus regardless of the firm performance while option grants to these CEOs are increasing. However, the interaction terms of withdrawn and performance show insignificant results.
To summarize, Table 7 provides a more sophisticated discussion of CEO‟s pay-performance sensitivity after an acquisition. The result extents the original model and develops comprehensive analysis of different incentive mechanisms.
2. More Implications in Bid Characteristics
In addition to the three bid characteristics indicated in previous sections, this section employs another two indicator variables, hostile takeover and contest bid, to examine the possible effects on CEOs compensation. Hostile takeover is a dummy variable set to one when the acquisition is conducted in a hostile manner.
A hostile deal in SDC M&A database is defined as the case that the board officially rejects the offer but the acquiror persists with the takeover. Contested bid is also an indicator variable that equals to one if the acquirors encountering competitors in the process of acquisition, and set to 0 otherwise. This factor is often found to reduce acquiror return since the price of the target is bid up in these
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situations (Hayward and Hambrick, 1997). In Table 8, panel A shows the frequency of these two characteristics in the study sample. It is apparent that in withdrawn deals, the ratios of hostile takeover and contested bid are much higher compared to those in successful deals. In the case of withdrawn deals, relatively more transactions have the hostile takeover or competitive bid features. This result is similar to the study of Kau et al. (2008) and Masulis et al. (2009) that hostile bids and competitive bids are more likely to be withdrawn.
Next, we conduct similar panel regressions as in the previous section and the panel B summarizes the result. The positive and significant coefficient of Hostile variable indicates that CEOs receive more incentives if the acquiring firms undertake a hostile takeover. However, after considering the acquisition status, CEOs are not treated indifferently in hostile takeovers. Though the insignificant coefficients of the interaction terms (SucAcq*Hostile and WithAcq*Hostile) show weak explanatory power, the result describes that CEOs suffer compensation losses after a successful and hostile acquisition. The reason may be that firms start to encounter problems after a hostile acquisition and thus result in negative impact on CEOs compensation. In contrast, the hostile takeovers that are withdrawn do not have negative effect on CEOs‟ total compensation.
Further, Model 3 and Model 4 provide the results that contested bids have positive impact on CEOs‟ compensation. Though previous literature indicates that competitive bids are more prone to be withdrawn, the competitiveness simultaneously implies the possible potential of the acquisitions. If acquiring firms successfully acquired the bid after competition, the value of the acquisition may possibly contribute to firm performance, and result in the increase of CEOs‟
payment. However, the results are both not significant at all.
To summarize, in comparison with the three bid characteristics, cash payment, the use of advisors, relative deal size, used in previous sections, hostile takeovers and contested bid provide less explanatory power in evaluating CEOs‟
post-acquisition payment.
---Insert Table 8 Here---
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