Equity Incentives of Target CEOs Preceding Acquisition

Abstract

In this dissertation, I investigate the magnitude, determinants, and consequences of equity grants to target firm CEOs prior to acquisitions. The board can use equity grants to compensate the CEO for selling the firm and increase his incentive to negotiate a better price with the acquirer, resulting in a higher premium. An opportunistic CEO can obtain equity grants to increase his share of takeover gains, and when the costs of opportunism exceed the benefits of incentive alignment, takeover premiums will be lower. I find that unexplained grants do not increase prior to an acquisition. However, I do find that board independence is associated with larger grants in the year before the acquisition for target CEOs and smaller grants in earlier years. In general, board independence is negatively associated with equity grants in target but non non-target firms. Further, I find that abnormal equity grants predicted by governance factors are positively associated with total takeover premiums. Overall, the evidence suggests that equity grants to target CEOs prior to a takeover are consistent with incentive alignment in the takeover process. There is no evidence to suggest that target CEOs use their power to obtain excessive grants at the expense of shareholders.