Compensation Differences and Merger Outcomes

Abstract

We find that differences in the compensation of acquirer and target firms' management teams negatively affect the outcomes of mergers. Larger differences in top management pay are associated with lower returns to the acquiring firm after the announcement of the merger and negative combined wealth effects. Larger pay differences also increase the likelihood of employee layoffs. Overall, our results suggest that differences in executive compensation are indicators of integration problems at merging firms, which in turn negatively affect merger outcomes.

Keywords: CEO compensation, Mergers and acquisitions, Post-merger integration

JEL Classification: G34, J33