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The Dark Side of Executive Compensation Duration: Evidence from Mergers and Acquisitions

Published online by Cambridge University Press:  02 November 2020

Zhi Li Open the ORCID record for Zhi Li [Opens in a new window]  and
Qiyuan Peng
Zhi Li*
Affiliation:
Chapman University Argyros School of Business & Economics
Qiyuan Peng
Affiliation:
University of Dayton School of Business Administrationqpeng1@udayton.edu
*
zli@chapman.edu (corresponding author)
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Abstract

We find that contrary to popular belief, CEOs with long compensation duration do not make better long-term investment decisions. Using a comprehensive pay duration measure, we find that acquisitions conducted by CEOs with long compensation duration receive more negative announcement returns, and experience significantly worse post-acquisition abnormal operating and stock performance, compared with deals conducted by CEOs with short compensation duration. The negative correlation between compensation duration and mergers and acquisitions (M&A) performance is driven by long-term time-vesting plans, not by performance-vesting plans. The results suggest that extending CEO pay horizons without implementing performance requirements is insufficient to improve managerial long-term investment decisions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 8 , December 2021 , pp. 2963 - 2997
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We thank an anonymous reviewer, Carl Chen, Gus De Franco, Ted Fee, Oleg Gredil, Candace Jens, Paul Malatesta (the editor), David Mauer, Gans Narayanamoorthy, Ryan Peters, Sheri Tice, Adam Welker, Ruizhong Zhang, Ting Zhang, and seminar participants at Tulane University, the 2017 Midwest Finance Association Conference, the 2019 California Corporate Finance Conference, and the 2019 Financial Management Association Conference for valuable comments. The authors assume responsibility for any remaining errors.

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