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Contractual revisions in compensation: Evidence from merger bonuses to target CEOs
Journal article   Open access   Peer reviewed

Contractual revisions in compensation: Evidence from merger bonuses to target CEOs

Eliezer M. Fich, Edward M. Rice and Anh L. Tran
Journal of accounting & economics, v 61(02-03), pp 338-368
Apr 2016
DOI: https://doi.org/10.1016/j.jacceco.2015.12.002
url
https://openaccess.city.ac.uk/id/eprint/13063/1/MergerBonus-08December2015.pdfView
Accepted (AM)Open Access (License Unspecified),  Open

Abstract

Abnormal accruals Acquisitions Merger bonus SEC enforcement action Synergies Wealth transfer
Do merger bonuses to target CEOs facilitate a wealth transfer from target to acquirer shareholders? We test this hypothesis against an alternative that bonuses enable a useful contractual revision in compensation contracts when takeovers generate small synergies. When target CEOs get a merger bonus, acquirers pay lower premiums, but they also typically get less in the form of low synergies. Moreover, both stock and accounting returns to the acquirers are lower on average in deals with target CEO bonuses. These results support the contractual revision alternative. Nevertheless, wealth transfer occurs when merger bonuses are present in deals where targets exhibit high pre-takeover abnormal accruals or are subject to SEC enforcement actions. •We study merger bonuses, eleventh hour side-payments often paid to target CEOs during acquisitions.•We test a version of Lambert and Larcker׳s hypothesis in which bonuses generate a wealth transfer to bidders.•Contrary to this hypothesis, we find that bidders do worse on average in deals with bonuses, despite paying lower premiums.•Bonuses generally enable a managerial contract revision critical in deals with low synergies.

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24 citations in Web of Science
23 citations in Scopus

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Domestic collaboration
International collaboration
Web of Science research areas
Business, Finance
Economics
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