The purpose of this paper is to review the existing empirical evidence and provide an integrative framework for the growing body of literature that is situated at the intersection of two highly debated topics: merger and acquisition (M&A) activities and executive compensation. The proposed framework structures the literature along two dimensions, such as M&A phases and firm's role in a M&A deal, allowing us to identify three main streams of research and five different conceptualizations of causal relationships between M&A transactions and executive compensation. Making a comprehensive review of empirical studies conducted to date we aim at shedding more light on the current and emerging knowledge in this field of investigation, discussing the inconsistencies encountered within each stream of research and suggesting promising directions for further exploration.

3 Merger and Acquisition Transactions and Executive Compensation: A Review of the Empirical Evidence

This study examines a sample of M&A announcements in the Asia-Pacific region during the time period of May 2013 – September 2013 to identify the post-facto effect of M&A announcements on the stock prices of the target and the bidding firms. The study has used the event study methodology where the Cumulative Average Abnormal Returns (CAAR) of the target and bidder firm’s stock prices in different event windows have been analyzed. A paired sample analysis has also been conducted by comparing the pre-announcement and post-announcement returns of the target and bidder firms’ stock prices in the event window of ±2 days. Across all the event windows, target firm’s stock price yields positive CAAR that is significantly different from zero. Unlike the target firms, bidder firms do not show statistically significant CAAR across all the event windows. The target firms depict that the post announcement returns are significantly greater than the pre-announcement returns, indicative of the immediate market reaction to the information disclosure.

https://www.sciedu.ca/journal/index.php/afr/article/download/4684/2805

M&A Announcements and Their Effect on Return to Shareholders: An Event Study

Rules of behavior guide decisions, and succession rules guide CEO selection. When CEO turnover is unanticipated, succession rules may not be able to guide the board. We examine unanticipated successions that occur when a CEO becomes ill or injured. These unanticipated successions are associated with a greater likelihood of former-CEO successors than when the successions are anticipated. The stock market reacts positively to former-CEO succession announcements. While this type of succession may not be consistent with succession rules, it may be consistent with their functions by reducing internal conflict and allowing directors to maintain fiduciary responsibility. ********** Leadership is an important component of successful corporate governance. CEO succession has received considerable attention in the extant literature. Succession planning's importance may need to be given top priority by boards of directors (Shen & Cannella, 2003). Ocasio (1999) analyzed the succession process and the rules that govern it. He argued that rules of behavior exist throughout all areas of corporate activity providing regularity and structure to corporate decisions. The succession process provides an interesting case in which we can observe how boards rely on formal and informal rules to make decisions. There may be cases in which companies are unable to utilize succession rules because the need for succession is unanticipated and occurs suddenly. There are a number of ways in which unanticipated events could lead to the immediate need for succession. For example, a CEO could suddenly decide to quit the company leaving the board with an immediate succession decision. However, in these cases, it may not be possible to determine if it was the CEO's decision or a forced turnover. Alternately, a CEO could die while in office or become ill or injured. We examine unanticipated succession decisions following CEO illness/injury announcements rather than CEO death, because when a CEO dies there is no choice; the board must appoint a successor. However, when a CEO is ill or injured, the executive and board may have a choice. They can appoint a successor or depending on the severity of the affliction let the CEO attempt to continue. We examine both the successions that occur after injury or illness announcements and decisions to let the CEO continue in office. The pressures and responsibilities of a senior executive combined with the age of most senior executives can lead to serious illness. What happens when a CEO becomes injured or ill and the affliction is serious? When would the board replace the afflicted CEO and who assumes the vacated positional responsibility? Unanticipated succession decisions may prohibit the board from relying on its normal rules of succession. Vancil (1987) defines several styles of internal succession including relay and horse-race successions. Each type of succession would have its own informal or formal rules guiding the process. What these succession types have in common are that the board promotes a successor CEO from a position below the CEO in the corporate hierarchy. In other successions, the CEO comes from outside the firm. For the purposes of this paper, we define normal succession to include both outside succession and successions in which the successor is promoted from below in the corporate hierarchy. However, when the succession is unanticipated such as when an executive becomes ill, the board may not find the normal rules of succession to be useful. When an executive is unable to function, a successor may be needed to both run the company and show the outside stakeholders that someone is in charge. We propose that in unanticipated successions boards may appoint someone from the board such as the board chair or former CEO. Such an appointment would likely show stakeholders that there will be continuity in company operations and that an experienced executive is in charge. …

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Ignoring Rules of Succession: How the Board Reacts to CEO Illness Announcements

The present study attempts to investigate whether differences in the quality of firm level corporate governance influence short-term performance of acquiring firms for a sample of companies by creating a corporate governance index. The study is based on a survey of sample of 155 companies having completed mergers and acquisitions deals announced during January 2003 to December 2008. We document a positive relationship between corporate governance score and short-term abnormal returns by constructing broad corporate governance Index (CGI) for Indian public listed companies. We use a broad, multifactor corporate governance score, which is based on the responses to objective survey questions supplemented with interviews of senior management, directors, CFOs, board members, company secretaries, compliance officers, and investor relation officers. The questionnaire is designed on the basis of major standard qualities relevant to measure the corporate governance. The present study concludes that companies with higher rank for corporate governance score have better short-term performance which is revealed from positive and higher abnormal returns during the event windows.

Impact of Corporate Governance Score on Abnormal Returns of Mergers and Acquisitions

The present study attempts to investigate whether differences in the quality of firm level corporate governance standards influence performance of acquiring firms for a sample of companies by creating a corporate governance index. The study is based on a survey of sample of 155 companies having completed mergers and acquisitions deals announced during January 2003–December 2008. The paper analyzes the relationship between corporate governance practices of the acquiring firms and abnormal returns during event windows around the announcement of M&A and post-M&A financial performance of the acquirers. The results reveal a positive relationship between corporate governance standards and the performance of the acquiring firms in short-run as well as long-run.

Impact of corporate governance score on abnormal returns and financial performance of mergers and acquisitions

This paper investigates the relationship between a firm "s corporate governance structure and the abnormal returns associated with acquisition announcements. Based on a sample of 294 acquisitions occurring from 1994 through 1998, it is found that acquiring firms have significant two-day abnormal returns of-2.71%. A multiple regression model that includes corporate governance variables has an Adjusted R-squared of 14.2% with board size, the sensitivity of the CEO's wealth to changes in share price, method of payment, and acquiring firm size all being significant explanatory variables. ********** The modern corporation is a complex organization of interlocking relationships. For publicly held companies, one of the most important relationships is between the owners and managers of the firm. This relationship is a classic example of the principal-agent relationship and is characterized by a potential misalignment of goals where the agent may behave in his own interest instead of acting in the principal's interest. A firm's corporate governance structure can be used to reduce the total agency costs of a firm through the monitoring of management actions and by aligning the managers' self-interests with those of shareholders. The board of directors has the responsibility to represent shareholders by monitoring top management. They do this by hiring and firing management, designing the executive compensation contract, and voting on major firm decisions. However, recent events from Enron to WorldCom indicate that the board may not always adequately monitor management. These events have stirred calls for board reform and the effect of board structure on corporate decision making is an important and widely debated topic. A firm's compensation policy should be designed to attract and retain quality managers and also to align the managers' incentives with shareholders. Executive compensation is primarily composed of a base salary, a bonus often tied to accounting returns, and equity-based incentives. Stock option grants are an increasingly important component of compensation and can align interests by making compensation and overall wealth more sensitive to shareholder performance. This study investigates the relationship between corporate governance and agency costs by examining the abnormal returns to acquisition announcements. While there are a variety of explanations for acquisitions that increase shareholder wealth, many acquisitions actually reduce shareholder wealth in both the short-run and the long-run. One explanation is that shareholder wealth reducing acquisitions are the result of the failure of corporate governance mechanisms to properly align managers' interests with those of shareholders. The following section of this paper reviews the literature on corporate governance and mergers. The third section presents the data and methodology, followed by the empirical results in the fourth section. The final section summarizes the findings with suggestions for further research. Literature Review The existing literature investigating the relationship between managers' interests and mergers examines the issue from varying perspectives. Morck, Shleifer, and Vishny (1990) test managerial self-interest indirectly by arguing that self-interested managers will either diversify or buy growth firms. Since these types of acquisitions were found to be more likely to reduce shareholder wealth, they concluded that they were driven by self-interest. Kroll, Simmons, and Wright (1990) found that CEO compensation increased following acquisitions due in part to the increased size of the firm. CEO shareholdings and incentive plans were found to be positively related to announcement cumulative abnormal returns (CARs) by Travlos and Waegelein (1992). Ueng (1998) also found that managers with large stockholdings relative to salary are more likely to make acquisitions that increase shareholder wealth. …

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Mark Swanstrom

Papers

Corporate Governance and the Abnormal Returns to Acquisition Announcements