CEO pay slice and acquisitions in Australia: the role of tournament incentives

PurposeThis paper investigates the influence of tournament incentives, measured by Chief Executive Officer (CEO) pay slice (CPS), on the acquisition decisions of Australian firms.Design/methodology/approachThis study applies ordinary least squares regression analyses to a sample of 1,429 acquisition observations announced by 986 unique Australian firms spanning the 2001–2015 period. Event study methodology was employed to capture the market reaction to acquisition announcements. Multinomial logit models, a two-stage least squares instrumental variable (IV) approach and propensity score matching (PSM) technique were performed for robustness and endogeneity correction purposes.FindingsThe results suggest that CPS has a positive and significant relationship with the announcement period abnormal return realised by acquirers, implying that executives are motivated to exert best efforts and support the CEO in making value-creating acquisitions. Further analyses reveal that management teams of high CPS firms demonstrate efficiencies in executing acquisitions. The positive relationship between the CPS and abnormal return is more pronounced in acquisitions of private targets, domestic targets and bidders with high-quality CEOs. These acquisitions make a significant contribution to the long-run performance of the firm, which provides support for the effort inducement hypothesis.Practical implicationsThe study's empirical evidence implies that the strong governance environment in Australia and a highly monitored acquisition market and compensation contracts motivates executives to exert their efforts to make value-enhancing acquisitions.Originality/valueThis paper appears to be the first investigation that makes a link between CPS in different components (i.e. short-term, long-term and total pay) as proxy for tournament incentives and the outcomes of both public and non-public acquisitions in the Australian setting.

Investor Inattention to All-Cash Acquisition Announcements: A Joint Day-Time Analysis in the Spanish Market

Prior studies suggest that investors have limited attention, which determines the speed with which information is incorporated into share prices and, in turn, affects the efficiency of the markets. Unlike other corporate events, the information contained in an acquisition announcement is generally less standard and more complicated to process. Therefore, investor inattention is less likely around this event. In this study we test the existence of investor inattention for a sample of all-cash acquisition announcements of listed and unlisted target firms released by listed Spanish firms from 1998 to 2018. Cash acquisitions allow us to control for the strategic behavior of overvalued companies engaged in stock-financed acquisitions. We perform a joint analysis of day of the week and time of trade from both a univariate and a multivariate perspective, after controlling for several factors that are related to the market reaction to acquisition announcements. Consistent with the notion that investors are less attentive to Friday announcements, we find a significant lower market reaction to acquisition announcements released during market trading hours both in terms of price and trading volume.