Type of Document Dissertation Author Reis, Ebru Author's Email Address reise@muohio.edu URN etd-12062006-153715 Title Managerial Incentives and Takeover Wealth Gains Degree Ph.D. Department Finance Advisory Committee
Advisor Name Title Jayant R. Kale Committee Chair Gerald D. Gay Committee Member Martin F. Grace Committee Member Omesh Kini Committee Member Keywords
- Managerial Incentives
- Executive Compensation
- Mergers and Acquisitions
Date of Defense 2006-08-17 Availability unrestricted Abstract ABSTRACT
MANAGERIAL INCENTIVES AND TAKEOVER WEALTH GAINS
By
EBRU REIS
DECEMBER 5, 2006
Committee Chair: Dr. Jayant R. Kale
Major Department: Finance
This study examines the relationship between managerial equity incentives and takeover wealth gains both for target and acquirer firms. Although there is some research about the effect of acquirer managers’ incentives on acquirer wealth gains, this paper is one of the first to investigate the effect of target managers’ incentives on the wealth effects of target firms in corporate takeovers. In addition, prior research has focused on the alignment effect of equity incentives in takeovers. However, takeovers provide an opportunity to liquidate personal equity portfolio for managers who hold an undiversified portfolio of their firms’ stock. In this study, I identify two hypotheses that potentially explain the effect of target managers’ incentives on wealth gains. While incentive alignment hypothesis predicts a positive relationship, diversification driven-liquidity hypothesis predicts a negative relationship between target managerial incentives and target wealth gains. I use a sample of 656 successful and 104 failed acquisitions over the period 1994-2003 to test these competing hypotheses. I find that for targets that are less (more) diversified, equity incentives are negatively (positively) related to wealth effects. I also find that the target managerial incentives increase the success probability of a takeover bid and this positive effect is less pronounced for diversified target managers. Based on these results, I conclude that incentive alignment argument is dominated by liquidity argument in less diversified target firms, however, holds in diversified firms. For acquirer managers, I do not find any evidence that supports incentive alignment or diversification arguments.
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