CEO long-term incentive pay in mergers and acquisitions.

Abstract

This paper analyzes the CEO incentives of inside debt in the form of deferred equity compensation in the context of M&A decisions. This study runs statistical regressions on the likelihood of a merger, whether the deal is diversifying, how much stock is used to pay for the deal, and the relative deal size controlling for CEO long-term incentive pay as the main variable of interest and including controls for firm characteristics, merger characteristics, industry, and year. This paper sheds light on LTIP effects before compensation changes occur after an M&A event. This study uses archival data from 1996 to 2005 for the United States with data collected from CRSP, Compustat, and SDC Platinum. This is one of the first studies to focus on the United States. When firms with higher levels of CEO long-term incentive pay decide to engage in an acquisition, those acquisitions are non-diversifying, relatively smaller deals, and are paid using a greater portion of stock. The evidence indicates that long-term incentive pay incentivizes CEOs to make less risky decisions for the benefit of debt holders and at the expense of shareholders. In addition, deals made are not necessarily diversifying as once believed