Superior Executive Incentives for Mergers and Acquisitions

Abstract

Using an event study approach on a sample of 72 acquisitions by Norwegian listed firms we study the effect of CEO stock and options based incentives on abnormal return and risk change associated with M&A activity. Our focus is on the bidder firms pre-acquisition incentive structures and its effect on the abnormal return and risk change from the transaction. The regression analysis we perform supports the hypothesis that cultural differences lead to different effects of equity based incentives in Norwegian compared to US firms. We find that CEO stock options decrease bidder shareholder returns in M&A, while CEO stock ownership has a non-significant negative influence. Both incentive structures have an insignificant impact on the CEOs risk taking behavior. Accordingly, we cannot recommend that shareholders use stocks or options to reduce agency problems.The thesis provides a platform on which shareholders in Norwegian firms can build their decisions regarding the optimal incentive contract for their CEO. However, our limited sample and the lack of supportive research for other markets outside the US, does not allow for generalizing our findings to markets outside Norway.