Using an extended international sample of domestic and cross-border mergers and acquisitions (M&A), this paper provides the first comprehensive examination of the role of ESG-linked executive compensation in the market for corporate control. The findings show that linking executive pay to ESG objectives is associated with significantly stronger post-acquisition Environmental, Social, and Governance performance. In addition, ESG-incentivized acquirers are more likely to finance transactions through green bond issuance, highlighting an important channel through which sustainability considerations shape corporate investment and financing decisions. Improved ESG ratings are, in turn, associated with economically meaningful increases in firm value following deal completion, with Environmental and Governance dimensions emerging as key drivers of value creation. However, these value gains are not immediately reflected in stock market reactions at the time of deal announcement, indicating that investors do not fully incorporate the long-term benefits of ESG-linked incentives contemporaneously. The findings are robust to multiple approaches addressing selection bias and endogeneity. The paper contributes to the literature on executive compensation, M&A, and sustainability.

We examine the impact of incentive compensation on the riskiness of acquisition decisions before and after the passage of the Sarbanes–Oxley Act (SOX). Before SOX, equity-based compensation was positively related to changes in risk around acquisition decisions, but this relationship weakened after the introduction of SOX. The drop in post-SOX acquisition-related risk stems from how managers respond to compensation-based incentives in the new regulatory environment. We show that executive stock options and pay-risk sensitivity drive post-SOX managerial responsiveness to risk-taking incentives. We also document a post-SOX value-enhancing effect on long-term stock-price performance and total factor productivity through these same incentive compensation mechanisms. The results are robust to selection bias, simultaneity, measurements of risk, and the definition of incentive compensation.

This paper examines the relation between executive compensation and value creation in merger waves. The sensitivity of CEO wealth to firm risk increases the likelihood of out-of-wave merger transactions but has no influence on in-wave merger frequency. CEOs with compensation linked to firm risk have better out-of-wave merger performance in comparison to in-wave mergers. We also present evidence that cross-sectional acquirer return dispersion is greater for in-wave acquisitions. Our results suggest that the underperformance of acquiring firms during merger waves can be attributed in part to ineffective compensation incentives, and appropriate managerial incentives can create value, particularly in non-wave periods.

This paper provides new evidence on the relation between incentive compensation and acquisition performance. We find that higher sensitivity of executives’ wealth to stock-price changes, Delta, is positively associated with post-acquisition stock-price performance and that higher sensitivity of executives’ wealth to stock-return volatility, Vega, leads to risk-increasing acquisitions only when the target is a non-publicly listed firm. In public deals, we find no difference in the deal synergies available to acquiring firm’s shareholders between high and low incentivised managers and no relation between incentive compensation and the quality of M&A decisions in terms of risk and stock-price returns. Our results are robust to a number of deal and firm characteristics and to controls for selection bias and endogeneity. Our findings suggest that when a publicly listed firm is acquired, the increased negotiation power of the target and information asymmetry considerations offset the positive impact of incentive compensation on both stock-price performance and risk-taking.

AbacusVolume 52, Issue 4 p. 685-771 Commentary Comments on Shan and Walter: ‘Towards a Set of Design Principles for Executive Compensation Contracts’* Stacey Beaumont, Corresponding Author Stacey Beaumont Associate Lecturer s.beaumont@business.uq.edu.au University of Queensland Business SchoolSearch for more papers by this authorRaluca Ratiu, Raluca Ratiu Assistant Professor IE University, SpainSearch for more papers by this authorDavid Reeb, David Reeb Professor National University of SingaporeSearch for more papers by this authorGlenn Boyle, Glenn Boyle Professor of Finance glenn.boyle@canterbury.ac.nz Department of Economics and Finance at the University of CanterburyHe is grateful to Warwick Anderson, Helen Roberts, and, especially, Neil Crombie for very helpful suggestions.Search for more papers by this authorPhilip Brown, Philip Brown Emeritus Professor Honorary Professor philip.brown@uwa.edu.au Business School, University of Western Australia Business School, University of New South WalesSearch for more papers by this authorAlexander Szimayer, Alexander Szimayer Professor Faculty of Business, Economics and Social Sciences, University of HamburgSearch for more papers by this authorRaymond da Silva Rosa, Raymond da Silva Rosa Professor of Finance ray.dasilvarosa@uwa.edu.au UWA Business School, the University of Western AustraliaSearch for more papers by this authorDavid Hillier, David Hillier david.hillier@strath.ac.uk University of StrathclydeSearch for more papers by this authorPatrick McColgan, Patrick McColgan University of StrathclydeSearch for more papers by this authorAthanasios Tsekeris, Athanasios Tsekeris University of StrathclydeSearch for more papers by this authorBryan Howieson, Bryan Howieson Associate Professor bryan.howieson@adelaide.edu.au School of Accounting and Finance, Business School, University of AdelaideThanks to Paul Coram and Dorothea Greiling for their helpful comments on an earlier version of this commentary.Search for more papers by this authorZoltan Matolcsy, Zoltan Matolcsy zoltan.matolcsy@uts.edu.au University of Technology, SydneySearch for more papers by this authorHelen Spiropoulos, Helen Spiropoulos University of Technology, SydneySearch for more papers by this authorJohn Roberts, John Roberts Professor john.roberts@sydney.edu.au University of Sydney Business SchoolSearch for more papers by this authorTom Smith, Tom Smith University of Queensland Business SchoolSearch for more papers by this authorQing Zhou, Qing Zhou q.zhou@business.uq.edu.au University of Queensland Business School School of Management, Xi'an Jiaotong University, ChinaZhou would like to acknowledge the funding support from the National Natural Science Foundation of China, NSFC(71602158).Search for more papers by this authorPeter L. Swan, Peter L. Swan peter.swan@unsw.edu.au University of New South Wales Business SchoolSearch for more papers by this authorStephen Taylor, Stephen Taylor Professor of Accounting stephen.taylor@uts.edu.au UTS Business School, University of Technology SydneyThe author acknowledges the helpful suggestions and feedback offered by Yaowen Shan.Search for more papers by this authorSue Wright, Sue Wright Associate Professor sue.wright@mq.edu.au Faculty of Business and Economics at Macquarie UniversitySearch for more papers by this authorDavid Yermack, David Yermack dyermack@stern.nyu.edu NYU Stern School of BusinessSearch for more papers by this author Stacey Beaumont, Corresponding Author Stacey Beaumont Associate Lecturer s.beaumont@business.uq.edu.au University of Queensland Business SchoolSearch for more papers by this authorRaluca Ratiu, Raluca Ratiu Assistant Professor IE University, SpainSearch for more papers by this authorDavid Reeb, David Reeb Professor National University of SingaporeSearch for more papers by this authorGlenn Boyle, Glenn Boyle Professor of Finance glenn.boyle@canterbury.ac.nz Department of Economics and Finance at the University of CanterburyHe is grateful to Warwick Anderson, Helen Roberts, and, especially, Neil Crombie for very helpful suggestions.Search for more papers by this authorPhilip Brown, Philip Brown Emeritus Professor Honorary Professor philip.brown@uwa.edu.au Business School, University of Western Australia Business School, University of New South WalesSearch for more papers by this authorAlexander Szimayer, Alexander Szimayer Professor Faculty of Business, Economics and Social Sciences, University of HamburgSearch for more papers by this authorRaymond da Silva Rosa, Raymond da Silva Rosa Professor of Finance ray.dasilvarosa@uwa.edu.au UWA Business School, the University of Western AustraliaSearch for more papers by this authorDavid Hillier, David Hillier david.hillier@strath.ac.uk University of StrathclydeSearch for more papers by this authorPatrick McColgan, Patrick McColgan University of StrathclydeSearch for more papers by this authorAthanasios Tsekeris, Athanasios Tsekeris University of StrathclydeSearch for more papers by this authorBryan Howieson, Bryan Howieson Associate Professor bryan.howieson@adelaide.edu.au School of Accounting and Finance, Business School, University of AdelaideThanks to Paul Coram and Dorothea Greiling for their helpful comments on an earlier version of this commentary.Search for more papers by this authorZoltan Matolcsy, Zoltan Matolcsy zoltan.matolcsy@uts.edu.au University of Technology, SydneySearch for more papers by this authorHelen Spiropoulos, Helen Spiropoulos University of Technology, SydneySearch for more papers by this authorJohn Roberts, John Roberts Professor john.roberts@sydney.edu.au University of Sydney Business SchoolSearch for more papers by this authorTom Smith, Tom Smith University of Queensland Business SchoolSearch for more papers by this authorQing Zhou, Qing Zhou q.zhou@business.uq.edu.au University of Queensland Business School School of Management, Xi'an Jiaotong University, ChinaZhou would like to acknowledge the funding support from the National Natural Science Foundation of China, NSFC(71602158).Search for more papers by this authorPeter L. Swan, Peter L. Swan peter.swan@unsw.edu.au University of New South Wales Business SchoolSearch for more papers by this authorStephen Taylor, Stephen Taylor Professor of Accounting stephen.taylor@uts.edu.au UTS Business School, University of Technology SydneyThe author acknowledges the helpful suggestions and feedback offered by Yaowen Shan.Search for more papers by this authorSue Wright, Sue Wright Associate Professor sue.wright@mq.edu.au Faculty of Business and Economics at Macquarie UniversitySearch for more papers by this authorDavid Yermack, David Yermack dyermack@stern.nyu.edu NYU Stern School of BusinessSearch for more papers by this author First published: 29 December 2016 https://doi.org/10.1111/abac.12091Citations: 3 *For corresponding and other author details please see the end of this article. Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Citing Literature Volume52, Issue4Special Issue: Issues in Executive CompensationDecember 2016Pages 685-771 RelatedInformation

This paper examines the relation between executive compensation incentives and the nature of merger transactions inside and outside of merger waves. We find that the sensitivity of CEO wealth to firm risk, vega, increases the likelihood of merger transactions outside of waves, but is unrelated to merger frequency inside wave periods. CEOs whose compensation is more closely tied to firm risk make better performing acquisitions when they acquire outside of merger waves, but this is not the case for in-wave deals, suggesting that underperformance of acquiring firms during waves can be attributed in part to ineffective compensation incentives. We also find that the cross-sectional dispersion of acquirers’ returns is higher for in-wave acquisitions relative to acquisitions made outside a wave, suggesting that out-wave acquisitions are characterized by lower uncertainty of future stock price returns. This is again restricted to high vega CEOs during out-wave periods.

This paper is developed around the set of design principles for executive compensation contracts as outlined in the study of Shan and Walter (2014). We propose guidance for determining an appropriate CEO starting compensation level based on past performance and the market for managerial talent. We also outline factors to be considered in determining annual changes to CEO compensation. This paper argues that stock options and restricted stock grants should become exercisable only upon meeting both time and performance criteria against an appropriate benchmark peer group. We agree with Shan and Walter’s (2014) recommendations regarding termination payments and make suggestions on how to apply these recommendations in practice. Hillier, McColgan and Tsekeris are from the University of Strathclyde, UK. This is an Accepted Author Manuscript which has been included in a larger article [Beaumont, S. et. al. (2016) Comments on Shan and Walter: ‘Towards a Set of Design Principles for Executive Compensation Contracts’. Abacus, 52: 685–771. doi: 10.1111/abac.12091] following editorial changes.

We empirically examine the impact of incentive compensation on the riskiness of acquisition decisions before and after the passage of Sarbanes-Oxley Act (SOX). Controlling for confounding events, firm characteristics and industry fixed effects, we find a substantial change in the relation between equity-related compensation and acquisition risk post-SOX stemming from a previously unidentified shift in the effectiveness of executive stock options to control managerial risk aversion. Not only has incentive compensation failed to offset the adverse impact of SOX on risk-taking activity but it has also significantly altered managerial incentives. The decrease in acquisition risk post-SOX cannot be solely attributed to changes in the structure of executive compensation but it additionally stems from the way managers perceive compensation-based incentives in the new regulatory environment. The results are robust to different measures of acquisition risk and alternative definitions of incentive compensation.

Examining the impact of incentive compensation on acquisition decisions over an 18year period we document a significant change in the relation between equity-based compensation (EBC) of acquirer‟s managers and investment decisions after the enactment of Sarbanes-Oxley Act (SOX). The passage of SOC has reduced the destruction of value on corporate acquisitions by significantly decreasing acquisition premiums but these changes have been more costly to Low EBC firms. They experience a stock price underperformance in relation to High EBC acquirers after SOX both around and following acquisition announcements. However, we find strong evidence that incentive compensation is a less effective mechanism in aligning the interests of managers to those of shareholders than corporate governance regulation. The results remain robust after controlling for means of payment, acquirer‟s growth prospects and executive ownership.

In this paper, we use the introduction of the Sarbanes-Oxley Act in 2002 to assess the impact of executive option and stock grants on corporate acquisition decisions. Amongst its many innovations, the Sarbanes-Oxley Act (SOX) has limited the value and effect of equity-related compensation. We find strong evidence of a shift in the factors driving acquisitions post-SOX. Specifically, while bid premiums have fell irrespectively of the type of acquirer, highly incentivised managers have become more risk-averse after the passage of the Act. Investors also appear to have recognised the effect of a change in equity-related pay. Both market response to acquisition announcements and post-acquisition performance have been improved after the introduction of SOX but these cannot be attributed to firms that grant high levels of incentive compensation to their managers. Our results are robust to a number of explanatory factors and confounding events in the post-SOX period.