Riding the merger wave: Uncertainty, reduced monitoring, and bad acquisitions

Value creation around merger waves: The role of managerial compensation

“…Our paper makes a number of contributions to the literature. We extend the findings of Duchin and Schmidt (), who show that adverse selection costs and inefficient monitoring of firm management can explain the acquiring firm underperformance during merger waves. This is driven, in part, by weaker compensation incentives provided to acquiring firm CEOs.…”

“…Moeller et al. () report higher short‐term returns and significant long‐run underperformance to in‐wave acquiring firms; Ovtchinnikov () provides evidence that bidder announcement returns are lower during merger waves that follow industry deregulation; and Duchin and Schmidt () find no difference in short‐term announcement returns for in‐wave and out‐of‐wave acquiring firms, but significant long‐term underperformance for acquisitions initiated during merger waves. Out‐of‐wave mergers increase long‐run value for the acquiring firm (Bouwman et al., ) and acquirer underperformance is shown to be concentrated in mergers initiated later in a wave (Goel & Thakor, ).…”

“…Duchin and Schmidt () find monitoring quality is poorer and information asymmetry higher during merger waves, which they attribute to weak acquirer corporate governance. In this paper, we directly test this hypothesis by asking whether CEO compensation incentives influence merger value creation around merger waves.…”

“…In non‐wave periods, when information asymmetries are low (Duchin & Schmidt, ), we predict that CEOs will respond positively to ex‐ante compensation incentives that reward risky projects (Coles, Daniel, & Naveen, ). For all merger decisions, managers receive private benefits of control including ex‐post increases in CEO compensation (Fu, Lin, & Officer, ; Goel & Thakor, ).…”

Motivated monitors: The importance of institutional investors׳ portfolio weights

“…In 33.4% of our transactions, both the target and the bidder operate in different industries and exhibit a mean relative size of about 34.8%. These statistics are comparable to those in Duchin and Schmidt (2013). For their 1980-2009 M&A sample, they report an incidence of 36.5% of transactions in which the parties to the deal operate in different industries and a mean relative size of 37.9%.…”