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Published: August 2, 2013

 
 

CEOs with Contracts Pull Off Better M&A Deals

One of the reasons these transactions paid off was that the managers’ job security appeared to push them to make riskier deals. Specifically, contracted CEOs were more attracted to targets with volatile stock returns, a recent history of underperformance, and obvious opportunities for growth. The nature of the contract also came into play. CEOs with fixed-term contracts or longer contract durations, long-term equity incentives in their annual compensation, and triggers in their severance package that accelerated stock and option vesting were all more likely to pull off more profitable acquisitions.

Overall, the analysis counters some of the widespread skepticism about the contracts. “The evidence suggests,” the author writes, “that CEO contracts, rather than sheltering inferior managers from discipline, actually help align CEO interests with shareholders, alleviate managerial risk aversion, and encourage risky value-enhancing acquisitions.”
 

Bottom Line:
This study of CEOs at S&P 500 firms finds that those with a contract pull off riskier but more valuable acquisitions, undercutting the concern that job security encourages leaders to pursue safer bets or personal agendas. Instead, by protecting managers against the cost of failure, contracts appear to reduce CEOs’ risk aversion and cause them to create more value for shareholders through their acquisitions.

Author Profile:

  1. Matt Palmquist is a freelance journalist based in Oakland, Calif.

 

 
 
 
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