Abstract: One-third of U.S. top executives have bonus incentives that are explicitly tied to the firm's size. We study how such ``growth-promoting bonuses'' influence firms' mergers and acquisitions (M&A) activities. We find that firms with bonus structures that promote growth are more prone to make acquisitions — especially acquisitions of a scale that help meet the bonus size target. We use shocks to sales from plausibly exogenous exchange-rate changes for exporting firms to identify these effects. Acquisitions by firms with growth-promoting bonuses have significantly lower abnormal returns, destroying value for the acquirers on average. These lower acquirer returns can be attributed to the selection of targets with lower synergies and, to a lesser extent, higher premiums paid. The growth-promoting bonuses tend to be sufficiently large such that — despite negative acquirer returns — the net monetary effect for executives who meet their sales bonus targets with a merger remains significantly positive.
Discussant: Jarrad Harford, University of Washington
Abstract: How to incentivize a manager to create value and be socially responsible? A manager can predict how his decisions will affect measures of social performance, and will therefore game an incentive system that relies on these measures. Still, we show that the compensation contract is based on measures of social performance when the level of social investments preferred by the board exceeds the one that maximizes the stock price. In this case, because of gaming, social investments are distorted and the sensitivity of pay to social performance is reduced. Relying on multiple measures based on different methodologies will generally mitigate inefficiencies due to gaming, i.e. harmonization of social performance measurement can backfire.
Abstract: Non-compete agreements (NCAs) limit outside employment options and, therefore, increase personal costs of job displacement for managers. Using state-level changes in NCA enforceability as a natural experiment, we find that managers are more averse to horizontal takeovers when NCA enforcement tightens. In particular, higher enforceability is associated with fewer sameindustry takeovers. Those that do materialize are more likely to be hostile, involve higher premiums, and are less likely to complete. Overall, the findings indicate that the use of NCAs and their enforceability have important implications for the market for corporate control and that banning NCAs could actually promote consolidation.
Abstract: We provide evidence that enhanced disclosure curbs CEO pay. Using a difference-in-differences design around the staggered implementation of the SEC EDGAR system from 1993 to 1996, we find that media coverage of executive pay increases following EDGAR implementation and that total CEO pay drops by 7-10%. The effect on pay is stronger for CEOs in the upper tail of the compensation distribution and concentrates in equity-based pay, resulting in weaker CEO compensation incentives (delta and vega). Our results suggest that disclosure-related changes in CEO incentives have negative implications for firm value. Finally, we find higher CEO turnover following EDGAR implementation.
