Template-Type: ReDIF-Paper 1.0
Author-Name: Swarnodeep Homroy
Author-Name-First: Swarnodeep
Author-Name-Last: Homroy
Title: Pay increase may not be a strong incentive for undertaking acquisitions
Abstract: A large body of literature suggests that CEOs have misaligned incentives to undertake acquisitions in an attempt to increase their pay. This paper shows that the likelihood of post-acquisition CEO turnover can act as a constraint on such incentives. The acquisition premium in pay decreases by 50% if the likelihood of post-acquisition turnover is controlled for. This suggests a significant survivor bias in previous estimates of acquisition premium. Given a smaller pay premium for undertaking acquisitions and non-zero risk of dismissal, a risk-averse agent may not have strong incentives to undertake an acquisition for the marginal pay increase. The likelihood of dismissal seems to carry stronger incentive effects than post-acquisition pay increase.
Creation-Date: 2014
File-URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/PayIncrease.pdf
File-Format: application/pdf
Number: 66910750
Classification-JEL: G34, J31, J33, M52
Keywords: Agency problem, mergers and acquisitions, CEO pay, Severance
Handle: RePEc:lan:wpaper:66910750