Stock-Based CEO Compensation Following Conglomerate Acquisitions

Abstract

I examine how stock-based compensation for CEOs is designed following corporate acquisitions conditional on the economic nature of acquisitions. Large conglomerate acquisitions are the type of events that represent significant changes in the economic environment of the company. Therefore, it is argued that implications of the two mainstream theories of incentive compensation, i.e., efficient contracting and managerial power theories, should be tested separately for conglomerate and related acquisitions. As predicted, the evidence suggests that stock-based compensation is employed more intensely after conglomerate acquisitions than otherwise, particularly if the acquisition leads to greater uncertainties and when the board is more independent. In other words, greater economic uncertainties that are likely to follow conglomerate acquisitions induce the board to optimally employ more stock-based incentives.

Keywords: CEO Incentive Compensation; Stock-Based Compensation; Board of Directors; Monitoring; Conglomerate Acquisitions; Target Industry; Related Industries

JEL Classification: D8; J3; G3