CEO Long-Term Incentive Pay in Mergers and Acquisitions

Abstract

I analyze the CEO incentives of inside debt in the form of deferred equity compensation in the context of M&A decisions. CEO inside debt holdings are negatively associated with the likelihood of the firm engaging in an M&A. When firms with higher levels of CEO inside debt decide to engage in an acquisition, those acquisitions are non-diversifying, relatively smaller deals, and are paid using a greater portion of stock. The evidence indicates that inside debt incentivizes CEOs to make less risky decisions for the benefit of debt holders and at the expense of shareholders.