Entrenchment or incentive? CEO employment contracts and acquisition decisions |
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| Institution: | 1. Mays Business School, Texas A&M University, College Station, TX 77843, United States;2. Henry B. Tippie College of Business, University of Iowa, Iowa City, IA 52242, United States;3. Peter T. Paul College of Business and Economics, University of New Hampshire, Durham, NH 03824, United States;1. EMLYON Business School, France;2. Cass Business School City University, London, United Kingdom;1. Gatton College of Business, University of Kentucky, Lexington, KY 40506, United States;2. Katz Graduate School of Business, University of Pittsburgh, Pittsburgh, PA 15260, United States;3. Rotterdam School of Management, Erasmus University, DR 3000 Rotterdam, The Netherlands;4. Fisher College of Business, The Ohio State University, 2100 Neil Avenue, Columbus, OH, United States;5. NBER, United States |
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| Abstract: | A long-standing controversy is whether CEO employment contracts insulate inferior managers from discipline leading to shareholder wealth destruction, or whether contracts alleviate managerial risk aversion and encourage value-enhancing decisions. Using a unique dataset on S&P 500 CEO employment contracts during 1993–2005, I find that acquirers with a CEO contract obtain better announcement returns, pay lower premiums for their targets, garner superior long-run post-acquisition operating performance, and undertake riskier deals than acquirers without a contract. Further investigation of individual contract provisions reveals substantial heterogeneity. Specifically, the fixed term rather than at will contract, longer contract duration, long-term equity incentives, accelerated stock and option vesting provisions in severance arrangement, and more refined definitions of just cause (good reason) for CEO termination (resignation) alleviate managerial risk aversion, reduce contracting ambiguity, and motivate value-creating decisions. |
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