Pay For Performance? CEO Compensation And Acquirer Returns In BHCs

The paper examines how managerial incentives affect acquisition decisions in the banking industry. It's found that higher Pay-for-Performance Sensitivity (PPS) leads to value-enhancing acquisitions. The banks CEOs who have higher PPS have significantly better abnormal stock returns around the acquisition announcements. On average, acquirers in the High-PPS group outperform their counterparts in the Low-PPS group by 1:4% in a three-day window around the announcement. Ex ante, higher PPS helps to prevent value-destroying acquisitions, while at the same time promote value-enhancing acquisitions. The positive market reaction can be rationalized by post-merger performance. Following acquisitions, banks with higher PPS experience greater improvement in their operating performance.