Title: Equity-based compensation and performance of acquisitions

Authors: Nont Dhiensiri, Olgun Fuat Sahin, Pattarake Sarajoti

Addresses: Northeastern Illinois University, 5500 North St. Louis Avenue, Chicago, Illinois 60625, USA. ' Minnesota State University, 1104 Seventh Avenue S. Moorhead, MN 56563, USA. ' Sasin GIBA of Chulalongkorn University, Sasa Patasala Building, Soi Chula 12 Phyathai Road, Bangkok 10330, Thailand

Abstract: We investigate how the equity-based compensation (EBC) of top executives affects the performance of acquisitions. In contrast to the results of Datta et al. (2001), we find that high EBC acquirers pay higher premiums for targets than that of low EBC acquirers. The cumulative abnormal return around the acquisition announcement is lower for acquiring firms with high EBC. However, we find that the long-run performance of acquiring firms is positively correlated with EBC. Our results suggest that high EBC acquirers experience lower sensitivity to size and momentum factors that unexpectedly lowers the cost of equity, leading to higher returns.

Keywords: EBC; equity-based compensation; mergers and acquisitions; M&A; executive pay; cost of equity; acquisition risk; top executives; abnormal returns; acquisition performance.

DOI: 10.1504/IJMEF.2011.040920

International Journal of Monetary Economics and Finance, 2011 Vol.4 No.3, pp.217 - 237

Published online: 26 Jun 2011 *

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