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Pay for Performance? CEO Compensation and Acquirer Returns in BHCs. Kristina Minnick, Bentley College Haluk Unal, University of Maryland and FDIC CFR Liu Yang, UCLA. CEO Compensation in BHCs. Pay-for-Performance Sensitivity.
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Pay for Performance?CEO Compensation and Acquirer Returns in BHCs Kristina Minnick, Bentley College Haluk Unal, University of Maryland and FDIC CFR Liu Yang, UCLA
Pay-for-Performance Sensitivity Change of the CEO's wealth (in $000s) given a 1% change in stock price
Our Paper • Research Question • Does higher pay-for-performance sensitivity (PPS) lead to value-enhancing managerial effort? • Application • Mergers and acquisitions • Tests • Decisions to acquire • Market reaction: announcement returns to stock- and bond-holders • Change of operating performance after mergers
Related Literature • Corporate governance and acquisitions • Datta, Iskandar-Datta, and Raman (2001) • Harford and Li (2007) • Falato (2007) • Masulis, Wang, and Xie (2007) • Governance in banks • Bliss and Rosen (2001) • John, Mehran and Qian (2007) • Adams and Mehran (2003)
Our Data • Completed acquisitions in the banking industry as identified from the SDC Platinum in the period of 1990 to 2005 • Data available • Financial data from Compustat Bank and Call Reports • Stock prices from CRSP • Compensation data from ExecuComp • Final sample • 178 deals made by 65 acquiring BHCs • The control sample contains 700 bank-years that are not related to M&A • Robustness check • Comprehensive governance dataset with: board structure, anti-takeover provisions, and institutional ownership • Bond return data from LBBD
Probability to Acquire (Table IV) Dependent Variable: 1: Acquire=Y 0: Acquire=N
Probability to Acquire • Banks with low PPS are more likely to acquire, controlling for other characteristics • Banks in the first quartile of PPS are 24% more likely to acquire as compared to banks in the last quartile • Moving from high-PPS group (mean + stdev) to low-PPS group (mean – stdev) lowers the acquisition probability by 37%
Acquire Returns by PPS Group The difference in CAR between Low- and High-PPS group is 71bps.
Stock Returns (Table 7) Dependent Variable: CAR(-1,1) One standard deviation increase of PPS will increase CAR by 0.51%
Bond Returns (Table 9) Dependent Variable: BAR(-1,1) High PPS also benefits bond-holders!
Change of Operating Performance (Table 10) Acquirers with high pre-acquisition PPS also improve more in their operating performance.
Conclusion • High pay-for-performance sensitivity lead to value-enhancing mergers • Banks with high PPS are less likely to acquire • Market react positively to acquiring banks with high PPS • Following acquisitions, acquirers with high pre-acquisition PPS improve more in operating performance