Do managerial incentives prevent value-destroying acquisitions?

Abstract

This paper examines how managerial incentives affect certain deal characteristics in acquisitions and how these characteristics are related to announcement returns and shareholder wealth. Based on our own results and extensive research, we identify large and diversifying acquisitions to be value-destroying. Our findings suggest that performance-based compensation, e.g. bonus and stock options, incentivizes the manager to acquire firms that maximize shareholder wealth. Furthermore, we present empirical evidence that CEO duality reduce the probability of engaging in diversifying, value-destroying acquisitions. These findings suggest that managerial incentives significantly affect shareholder wealth in context of acquisitions, where performance-based compensation and CEO duality prevent valuedestroying acquisitions to some extent.