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Director compensation incentives and acquisition performance

Abstract : 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.
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https://hal-univ-rennes1.archives-ouvertes.fr/hal-01614572
Contributor : Anne l'Azou <>
Submitted on : Wednesday, October 11, 2017 - 10:38:44 AM
Last modification on : Thursday, February 7, 2019 - 5:41:01 PM

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Ismail Lahlou, Patrick Navatte. Director compensation incentives and acquisition performance. International Review of Financial Analysis, Elsevier, 2017, 53, pp.1 - 11. ⟨10.1016/j.irfa.2017.07.005⟩. ⟨hal-01614572⟩

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