Richard J. Rosen
Federal Reserve Bank of Chicago – Economic Research
FRB Chicago Working Paper No. 2004-22
This paper examines the interplay between CEO compensation and merger programs (frequent acquisitions by the same firm). CEO compensation rises more after growth from program acquisitions than after internal growth or growth from one-off acquisitions. During a merger program, the increase in CEO compensation is much larger when the acquirer’s stock price is rising than at other times, something not true for other types of growth. Merger programs also show a distinct evolution. Initially, program mergers are received better by the stock market than are one-off mergers. As a program progresses, however, the acquisitions tend to have lower announcement reactions and long-run returns. In addition, mergers later in a program have a smaller effect on CEO compensation. There is evidence that some firms are predisposed to make acquisitions. Firms that have made acquisitions in the recent past and that already pay their CEOs well are more likely to make future acquisitions. This suggests that there may be a managerial motivation for merger programs: firms where CEOs can expect to get large compensation increases from acquisitions are more likely to have merger programs.