Mergers, executive compensation, and post-merger performance of acquiring firms

• Main Author: Goh, L.
• Published: University of Cambridge 2006
• Subjects: 338.6041
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.599461

This thesis examines the relationships between takeovers, executive compensation, and post-merger performance of acquiring firms using a sample of UK firms making acquisitions in the 1999-2000 period. While literature exists covering these research areas individually, there has been little research on the takeover-compensation relationship. Existing research on compensation finds a strong positive relationship between firm size and executive compensation, while much of the empirical literature on takeovers finds a non-positive change in performance of acquiring firms following takeover. The existence of these two relationships supports the conjecture that executives will have an increase in compensation following takeover due to increased firm size, while shareholders are likely to lose. Empirically, this thesis examines the elasticity of pay to firm size and performance variables surrounding takeover. It finds that on average, firm size is a key determinant of compensation, and that in takeover years, there is no extra bonus or under-compensation that is not already accounted for by size or performance variables. This suggests that the executive is compensated at the same elasticity in merger years, i.e. for the increased firm size. When changes in the value of the executive’s shareholdings in the firm are included in his monetary interest, there is evidence of an alignment of interests with the shareholder, but of a low magnitude. The thesis also examines the actual post-merger performance of the same sample of firms, principally finding a non-positive return, but different performance depending on the characteristics of the acquiring firm and the takeover. It finds that market performance is better in firms where executive shareholding is high relative to compensation, firms that pay with cast, those making relatively small takeovers, and firms with a low market-to-book value. Performance is worse among firms with low ownership, those paying in some part with shares, and those with high market-to-book value. This adds to existing research and provides evidence in a more recent context, and shows that the decline is present for the same sample in which pay is elastic to firm size, which grows via takeover. Finally, these relationships between executive compensation, takeover, and post-merger firm performance are examined using firm-specific examples, primarily using cases drawn from the sample of firms. The results from this thesis show that executives may have an incentive to carry out takeovers, because their compensation is likely to increase, proposing compensation as a driver for takeover. In addition, confirming the decline in firm performance following takeover, it suggests that these decisions are made at the expense of shareholders, while executives gain.