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 Corporate coworking as a driver of innovation
22.11.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

nachricht Mathematical confirmation: Rewiring financial networks reduces systemic risk
22.06.2017 | 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: Long-lived storage of a photonic qubit for worldwide teleportation

MPQ scientists achieve long storage times for photonic quantum bits which break the lower bound for direct teleportation in a global quantum network.

Concerning the development of quantum memories for the realization of global quantum networks, scientists of the Quantum Dynamics Division led by Professor...

Im Focus: Electromagnetic water cloak eliminates drag and wake

Detailed calculations show water cloaks are feasible with today's technology

Researchers have developed a water cloaking concept based on electromagnetic forces that could eliminate an object's wake, greatly reducing its drag while...

Im Focus: Scientists channel graphene to understand filtration and ion transport into cells

Tiny pores at a cell's entryway act as miniature bouncers, letting in some electrically charged atoms--ions--but blocking others. Operating as exquisitely sensitive filters, these "ion channels" play a critical role in biological functions such as muscle contraction and the firing of brain cells.

To rapidly transport the right ions through the cell membrane, the tiny channels rely on a complex interplay between the ions and surrounding molecules,...

Im Focus: Towards data storage at the single molecule level

The miniaturization of the current technology of storage media is hindered by fundamental limits of quantum mechanics. A new approach consists in using so-called spin-crossover molecules as the smallest possible storage unit. Similar to normal hard drives, these special molecules can save information via their magnetic state. A research team from Kiel University has now managed to successfully place a new class of spin-crossover molecules onto a surface and to improve the molecule’s storage capacity. The storage density of conventional hard drives could therefore theoretically be increased by more than one hundred fold. The study has been published in the scientific journal Nano Letters.

Over the past few years, the building blocks of storage media have gotten ever smaller. But further miniaturization of the current technology is hindered by...

Im Focus: Successful Mechanical Testing of Nanowires

With innovative experiments, researchers at the Helmholtz-Zentrums Geesthacht and the Technical University Hamburg unravel why tiny metallic structures are extremely strong

Light-weight and simultaneously strong – porous metallic nanomaterials promise interesting applications as, for instance, for future aeroplanes with enhanced...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

See, understand and experience the work of the future

11.12.2017 | Event News

Innovative strategies to tackle parasitic worms

08.12.2017 | Event News

AKL’18: The opportunities and challenges of digitalization in the laser industry

07.12.2017 | Event News

 
Latest News

Long-lived storage of a photonic qubit for worldwide teleportation

12.12.2017 | Physics and Astronomy

Multi-year submarine-canyon study challenges textbook theories about turbidity currents

12.12.2017 | Earth Sciences

Electromagnetic water cloak eliminates drag and wake

12.12.2017 | Power and Electrical Engineering

VideoLinks
B2B-VideoLinks
More VideoLinks >>>