Tournament-based incentives and mergers and acquisitions

Abstract

This research examines the relation between tournament-based incentives, which are proxied by the difference between a firm's CEO pay and the median pay of the senior managers, and mergers and acquisitions (M&As). We find that tournament-based incentives are positively related to firm acquisitiveness and acquiring firms' stock and operating performance. Further analysis indicates that positive acquisition performance increases the likelihood of the CEO being promoted from inside the acquiring firm. Our evidence is consistent with the view that tournament-based incentives motivate acquiring firms' managers to make greater efforts and take more risk that result in superior acquisition performance.

CEO pay slice and acquisitions in Australia: the role of tournament incentives

“…We find that CPS has a positive and significant influence on the announcement period abnormal returns earned by acquirers, suggesting a belief by the market that tournament incentives among executives result in value-creating acquisitions. Our finding contrasts with the evidence uncovered by Hasan et al (2020), who report that tournament incentives are negatively related to market reaction to acquisition announcements in the US market, but corroborates the positive association reported by Nguyen et al (2020). Our findings are more in line with the effort inducement hypothesis.…”

“…Similar to the existence of conflicting theoretical arguments, the existing empirical studies provide mixed evidence on the association between CEO pay disparity and acquisition outcomes. Nguyen et al (2020) show that tournament-based incentives increase the likelihood IJMF 18,5 of a firm engaging in acquisitions and uncover a positive association between the difference between the compensation of the CEO and the median pay of other senior executives and the announcement period abnormal returns earned by acquirers. Minnick et al (2011), who investigated the influence of CEO pay-for-performance sensitivity (PPS) on acquisition decisions in the banking industry, find that high-PPS acquirers outperform their low-PPS counterparts by earning significantly higher abnormal returns during the announcement period of acquisitions and recording greater improvements in their post-acquisition operating performance.…”

“…Acquisitions are viewed as large and long-term investments that are difficult to reverse and that require the involvement of other executives (Graebner, 2009; Greene and Smith, 2018; Nguyen et al , 2020). In consequence, an acquisition decision can be seen as a scenario where tournament incentives play a significant role in executives' decision-making process.…”

“…The existing literature reveals two types of impacts that tournament incentives may have on acquisition decisions. One line of literature argues that, if the executives are induced by tournament incentives (Boganno, 2001; Kale et al , 2009; Lazear and Rosen, 1981), they are likely to support the CEO in selecting value-creating targets because of their desire to win the tournament prize (the pay gap) (Hasan et al , 2020; Nguyen et al , 2020). This is referred to as the effort inducement hypothesis.…”

A Systematic Review on the Executive Compensation Gap and Its Multiple Impacts on the Company

“…Other Impacts: In addition to the above aspects, researchers have found that the executive compensation gap can have an impact on other aspects of a company. Researchers supporting tournament theory argue that the larger the executive compensation gap exists the more firms will tend to be robust in financial reporting (Gad, Nguyen and Scapin, 2022), achieve superior acquisition performance, and also help to improve the merge and acquisition (M&A) capability (Nguyen et al, 2020) and positively influence the international business expansion of company (Lin and Cheng, 2013), while researchers supporting equity theory argue that maintaining a smaller executive compensation gap is necessary to improve an organization's ability to cope with adversity and turnaround (Tao, Xu and Liu, 2020), and that widening the executive compensation gap leads to lower corporate responsibility in environmental terms (Zhang, Tong and Li, 2020), and some researchers hold the same view as Fu, Zhang and Wu (2022), who argue that either the tournament theory or the equity theory can separately explain the relationship and proposed that the executive compensation gap has an inverted U-shaped effect on the total factor productivity of company (Dai, Kong and Xu, 2017).…”