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Impact of CEO Compensation Structure on M&A Performance
 

Impact of CEO Compensation Structure on M&A Performance

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Master Thesis Defense. Topic "Impact of CEO Compensation Structure on M&A Performance" (Rotterdam School of Management/ Erasmus University)

Master Thesis Defense. Topic "Impact of CEO Compensation Structure on M&A Performance" (Rotterdam School of Management/ Erasmus University)

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    Impact of CEO Compensation Structure on M&A Performance Impact of CEO Compensation Structure on M&A Performance Presentation Transcript

    • Master Thesis DefenseRotterdam School of Management, Erasmus University Rotterdam Department of Finance Master Thesis M&A and Corporate Governance “Impact of CEO Compensation Structure on M&A Performance” Anton Zhukov Student ID: 336825 RSM Finance & Investments Coach: Michiel Wolfswinkel Co-reader: Jordan Otten Date: 07/09/2012 Master Thesis Defense
    • Presentation Outline• Topic Introduction• Research Question• Hypotheses• Methodology & Data Collection• Data Analysis• Research Findings• Conclusion Master Thesis Defense
    • Topic IntroductionTopic - M&A and Corporate Governance• Literature Review I. Firm Size Theory II. Free Cash Flow Theory III. Hubris Hypothesis IV. CEOs’ Personal Risk Hypothesis Master Thesis Defense
    • Research Question“…we document a strong positive relation between acquiring managers’ equity-based compensation (EBC) and stock price performance around and following acquisition announcements.” - Datta, Iskander-Datta, Raman (2001)“How does CEOs compensation structure affect M&A performance?” Master Thesis Defense
    • HypothesesM&A Performance measures • Acquisition Premiums • Acquisition Abnormal Returns (ARs)• Equity-based compensation (EBC) and Acquisition Premiums H1: Higher fraction of equity in total compensation leads to lower acquisition premiums paid by acquiring companies.• Equity-based compensation (EBC) and Acquisition Abnormal Returns H2: Higher fraction of equity in total compensation leads to higher cumulative abnormal returns (CARs) to the shareholders of acquiring companies. Master Thesis Defense
    • Methodology & Data CollectionIndependent Variable (X) in time t-1 Dependent Variables (Y) in time tCEO Compensation Components Acquisition Premium Hypothesis • Base Salary • Price per Share/Target Share Price 4 • Bonus Weeks Prior to Announcement • Other Annual • Restricted Stock Granted Acquisition Abnormal Returns (ARs) • Options Granted (Black-Scholes) Hypothesis • Long-term Incentives Payouts • Cumulative Abnormal Returns (CARs) • All Other Total • Market Model (MM) - benchmark Master Thesis Defense
    • Methodology & Data CollectionPeriod: January 1, 1995 – December 31, 2007Acquirer & Target are public companiesIndustry: High-TechLocation: the United StatesDeal Type: Disclosed Value M&ADeal Status: CompletedAcquiror holds more than 50% of stock after acquisitionFinal Number of Analyzed Transactions: 332 transactions by 216 acquirersDatabases: • Thomson One Banker • Compustat Standard & Poor’s ExecuComp Annual Compensation (WRDS) • CRSP/Compustat Merged - Fundamentals Annual (WRDS) • Eventus (WRDS) Master Thesis Defense
    • Data Analysis Master Thesis Defense
    • Data AnalysisH1: Equity-Based Compensation and Acquisition Premiums • Median equity-based compensation = 61.39% Average Acquisition 1995-1999 2000-2002 2003-2007 1995-2007 Premium High EBC Firms 55.61% 73.87% 46.30% 58.49% Low EBC Firms 52.05% 50.19% 52.97% 51.88% Master Thesis Defense
    • Data AnalysisH2: Equity-Based Compensation and Acquisition Abnormal Returns • Median equity-based compensation = 61.39% Average Cumulative 1995-1999 2000-2002 2003-2007 1995-2007 Abnormal Returns High EBC Firms -4.18% -4.97% -2.26% -3.77% Low EBC Firms -1.40% 0.02% -0.33% -0.77% Master Thesis Defense
    • FindingsRegression Analysis H1: Equity-based Compensation and Acquisition Premiums PREMIUM = 50.753 + 0.035*OFFPR_TO_EPS – 0.192*EBC_PCT + εit This confirms our initial H1 hypothesis, which holds that higher proportion of equity- based compensation in a total CEOs’ compensation leads to lower acquisition premiums. H2: Equity-based Compensation and Acquisition Abnormal Returns CAR = -0.004 + 1.4189296448509635E-5*RSIZE - 4.315350812132981E- 4*EBC_PCT + εit These findings contradict our initial hypothesis H2, which holds that higher fraction of equity in total compensation leads to higher cumulative abnormal returns (CAR) to the shareholders of acquiring companies. Master Thesis Defense
    • Conclusion• Higher fraction of equity in total compensation can lead to lower acquisition premiums paid by acquiring companies.• Higher fraction of equity in total compensation does not necessary lead to higher cumulative abnormal returns (CARs) to the shareholders of acquiring companies. Possible explanation “Risk-reducing strategies may be emphasized as managers expand their stock ownership. Consequently the risk-reducing acquisitions lead to lower abnormal returns to the shareholders of the acquiring firms.” - Wright et al. (2002) Master Thesis Defense
    • Master Thesis DefenseRotterdam School of Management, Erasmus University Rotterdam Department of Finance Master Thesis M&A and Corporate Governance “Impact of CEO Compensation Structure on M&A Performance” Date: 07/09/2012 Master Thesis Defense