Firms whose CEOs had high ownership stakes prior to a merger were also more likely to finance the deals using cash instead of stock. Previous research has shown that returns to acquiring companies are higher, on average, for cash-financed mergers and lower for stock-funded deals. Companies with stock-owning CEOs also paid lower premiums, on average, for the firms they acquired.
Finally, the authors examined the acquiring firms’ performance following the merger, tracking their stock returns for two years after the completion of the deal. “We find that performance of firms where CEOs had large ownership stakes pre-merger is significantly higher than at firms where CEOs had low ownership stakes,” the authors write.
The form of compensation awarded to CEOs thus has statistically and financially significant repercussions on the decisions surrounding merger deals, the authors say, and ultimately helps determine whether the deals are successful. “The broader implication of our study is that CEO ownership and option holdings are not interchangeable mechanisms when it comes to incentivizing CEOs, at least around mergers,” the authors conclude. “Separating the two, therefore, allows us to better isolate whether either mechanism aligns incentives with shareholders and may add to the debate on how to best compensate CEOs.”
The structure of CEOs’ incentive packages helps determine the likelihood and success of their firm’s acquiring another company. CEOs with larger ownership stakes in their companies are less likely to oversee an acquisition, compared with CEOs whose compensation is tied more to stock options. But when they act, stock-owning CEOs generally strike better deals for their shareholders and see improved postmerger performance.