CEO Incentives Heavily Affect Merger Decision-Making

Mergers and acquisitions are a mainstay of the corporate world – recently, for example, there was much talk about the Facebook and Instagram merger –but what role does CEO compensation play in these deals? Several Drexel University business professors took a look, and their findings were featured in a recent edition of Strategy + Business magazine.mergers1

Dr. David A. Becher, an associate professor of finance in Drexel’s LeBow College of Business; Dr. Jennifer L. Juergens, an assistant professor of finance; and Ph.D. student Jack Vogel found that CEOs with large blocks of company stock as part of their compensation package tend to spearhead fewer but higher quality deals that maximize shareholder value and produce better returns.

On the other hand, CEOs with higher levels of stock options strike more deals and are more likely to employ external consultants for these deals that end up reducing shareholder value and hampering post-merger performance.

Why the difference in behavior? The authors say this can be traced back to the CEOs’ incentives for the merger. CEOs who own stock tend to agree with other shareholders when deciding on a merger while those with a larger number of options are more conflicted and often take into consideration their own interests.

The authors came to these conclusions after analyzing a large sample of data on mergers that occurred in the U.S. from 1996-2008. Their original paper appears in July 2012 in the Social Science Research Network and is the first to prove show that “the mechanism by which the acquirer CEO is ‘incentivized’ prior to a merger affects both the merger structure and ultimately the success of the deal.”

The full paper, “Do Acquirer CEO Incentives Impact Mergers?” can be downloaded at

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