Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

CEOs' worth increases even when poor acquisitions are made

20.06.2007
Following an acquisition of another company, chief executive officers' compensation levels usually increase, even when the purchase turns out to be unprofitable, according to researchers at the University of Washington and University of British Columbia.

That's because while a bad merger can decrease the value of a company's stock and options, CEOs typically acquire new stock options once the deal goes through, thus making up for any financial losses suffered as a result of the buy.

"There are major personal financial gains to be made by CEOs after any merger or acquisition so even if it ends up being a financial loss, shareholders suffer but CEOs nearly always come out ahead financially," says Jarrad Harford, an associate professor of finance and business economics at the UW Business School and co-author of the study. "The net effect is that a CEO's wealth actually increases even if he makes a poor acquisition decision. The experience is quite different for the shareholders."

However, he adds, companies whose boards of directors are more independent from management and generally exercise stricter corporate governance are more likely to penalize executives for unprofitable merger deals.

For their study, the researchers examined 370 mergers of publicly traded U.S. companies between 1993 and 2000. They compared the wealth of the CEOs of the purchasing companies a year before and a year after the acquisitions. Their wealth was determined by calculating their salaries, stock and option grants, and the value of their portfolio of existing stock and options.

They divided the purchasing companies into two groups: those whose stock increased after the merger, and those whose stock suffered. The stock value of the underperforming companies lagged the broader market by roughly 52 percent. Yet because of new stock and option grants, three-quarters of the time those CEOs became wealthier despite the downturn.

“While CEOs are still better off making good acquisition decisions, there is little penalty to making bad ones, so this sets up a strong incentive to acquire, even when the chance of failure is high. The sheer magnitude of new stock and options grants given when the firm’s size increases more than offset the effect of the acquisition on the CEO’s pre-merger portfolio.”

The authors note that one way to evaluate the independence of a board is the proportion of board members who preceded the CEO, and therefore were not nominated to the board by the CEO.

"Investors who are concerned about evaluating a CEO's potential payoffs from undertaking future acquisitions should consider examining the strength of the board," said Harford.

Nancy Gardner | EurekAlert!
Further information:
http://www.washington.edu

More articles from Business and Finance:

nachricht Europe's microtechnology industry is attuned to growth
10.03.2017 | IVAM Fachverband für Mikrotechnik

nachricht Preferential trade agreements enhance global trade at the expense of its resilience
17.02.2017 | International Institute for Applied Systems Analysis (IIASA)

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: A Challenging European Research Project to Develop New Tiny Microscopes

The Institute of Semiconductor Technology and the Institute of Physical and Theoretical Chemistry, both members of the Laboratory for Emerging Nanometrology (LENA), at Technische Universität Braunschweig are partners in a new European research project entitled ChipScope, which aims to develop a completely new and extremely small optical microscope capable of observing the interior of living cells in real time. A consortium of 7 partners from 5 countries will tackle this issue with very ambitious objectives during a four-year research program.

To demonstrate the usefulness of this new scientific tool, at the end of the project the developed chip-sized microscope will be used to observe in real-time...

Im Focus: Giant Magnetic Fields in the Universe

Astronomers from Bonn and Tautenburg in Thuringia (Germany) used the 100-m radio telescope at Effelsberg to observe several galaxy clusters. At the edges of these large accumulations of dark matter, stellar systems (galaxies), hot gas, and charged particles, they found magnetic fields that are exceptionally ordered over distances of many million light years. This makes them the most extended magnetic fields in the universe known so far.

The results will be published on March 22 in the journal „Astronomy & Astrophysics“.

Galaxy clusters are the largest gravitationally bound structures in the universe. With a typical extent of about 10 million light years, i.e. 100 times the...

Im Focus: Tracing down linear ubiquitination

Researchers at the Goethe University Frankfurt, together with partners from the University of Tübingen in Germany and Queen Mary University as well as Francis Crick Institute from London (UK) have developed a novel technology to decipher the secret ubiquitin code.

Ubiquitin is a small protein that can be linked to other cellular proteins, thereby controlling and modulating their functions. The attachment occurs in many...

Im Focus: Perovskite edges can be tuned for optoelectronic performance

Layered 2D material improves efficiency for solar cells and LEDs

In the eternal search for next generation high-efficiency solar cells and LEDs, scientists at Los Alamos National Laboratory and their partners are creating...

Im Focus: Polymer-coated silicon nanosheets as alternative to graphene: A perfect team for nanoelectronics

Silicon nanosheets are thin, two-dimensional layers with exceptional optoelectronic properties very similar to those of graphene. Albeit, the nanosheets are less stable. Now researchers at the Technical University of Munich (TUM) have, for the first time ever, produced a composite material combining silicon nanosheets and a polymer that is both UV-resistant and easy to process. This brings the scientists a significant step closer to industrial applications like flexible displays and photosensors.

Silicon nanosheets are thin, two-dimensional layers with exceptional optoelectronic properties very similar to those of graphene. Albeit, the nanosheets are...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

International Land Use Symposium ILUS 2017: Call for Abstracts and Registration open

20.03.2017 | Event News

CONNECT 2017: International congress on connective tissue

14.03.2017 | Event News

ICTM Conference: Turbine Construction between Big Data and Additive Manufacturing

07.03.2017 | Event News

 
Latest News

'On-off switch' brings researchers a step closer to potential HIV vaccine

30.03.2017 | Health and Medicine

Penn studies find promise for innovations in liquid biopsies

30.03.2017 | Health and Medicine

An LED-based device for imaging radiation induced skin damage

30.03.2017 | Medical Engineering

VideoLinks
B2B-VideoLinks
More VideoLinks >>>