Director compensation incentives and acquisition performance

• Published in: International review of financial analysis 2017-10, Vol.53, p.1-11
• Main Authors: Lahlou, Ismail, Navatte, Patrick
• Format: Article
• Language: English
• Subjects: Acquisitions; Agency theory; Bargaining power; Board of directors; Compensation; Director incentives; Economics and Finance; Humanities and Social Sciences
• ISSN: 1057-5219; 1873-8079
• DOI: 10.1016/j.irfa.2017.07.005

This paper investigates the relation between director compensation structure and shareholder interests in the context of acquisitions. Our evidence suggests that acquirer firms that compensate their directors with a higher proportion of incentive-based compensation have significantly higher stock returns around the announcement. Compared to acquirers in the low equity-based compensation group, acquirers in the high equity-based compensation group outperform by 9.54% in a five-day period surrounding the announcement date. These results hold even after controlling for endogeneity issues. We further find that acquirers with higher equity-based pay exhibit greater improvements in stock price and operating performance in the three years following acquisitions. An increase in director equity-based pay also results in a lower acquisition premium for targets. These results indicate that equity-based compensation provides incentives for directors to make decisions that meet the interests of shareholders. •We provide new evidence on the effect of using the firm's stock to reward directors•Director equity-based compensation (EBC) is related to greater acquirer announcement returns•Director EBC is positively associated with future stock price and operating performance•We also find that director EBC is inversely related to acquisition premiums for targets