The positive relation of stock market valuation to mergers and acquisitions(M&A) activity, especially stock-financed deals, is well known (e.g., Rhodes-Kropf,Robinson, and Viswanathan, 2005). In particular, starting with the bull market of the1990s and stretching to the recent financial crisis, there was intense M&A activity, withextensive use of equity financing.
But whether this historically large M&A wave wasconsistent with shareholder value creation is a contentious issue in the literature. Abenign view is that following the burst of equity-based compensation awards in the 1980sand early 1990s (Frydman and Saks, 2010) managers had incentives to pursue value-creating corporate restructuring (Datta, Iskander-Datta, and Raman, 2001; Holmstromand Kaplan, 2001). However, Moeller, Schlingemann, and Stulz (2005) argue that
acquiring firms’ shareholders
in fact lost substantial wealth due to the M&A activity inthe 1990s; that is, managers appeared to have pursued M&A
to shareholders’ detriment
.The literature suggests that entrenched CEOs may engage in M&A to derive
(i.e., non-pecuniary) benefits of control (Jensen, 1986; Shleifer and Vishny, 1989)and that M&A activity may be driven by subjective CEO preferences (Jenter andLewellen, 2011). There is also evidence of positive effects of M&A activity on CEOcompensation. Bliss and Rosen (2001) and Harford and Li ( 2007) report that M&Aactivity has a greater influence on CEO compensation compared with other investments,while Grinstein and Hribar (2004) find that powerful CEOs receive M&A bonuses forcompleting large transactions. But can managers strategically leverage M&A successes toamplify rent extraction and increase their compensation? And, if so, what factorsfacilitate greater rent extraction through M&A? These issues are largely unexplored inthe literature and are the focus of our paper.However, resolving the relation of M&A activity to executive compensation posessome challenging identification issues
. There is an endogeneity “problem” because M&A
and executive compensation are major decisions of the firm and both presumably respondto firm- or time-specific common factors, some of which may be unobservable (or latent).In particular, the positive effects of M&A activity on executive compensation may not
of 2008, from 1990 to 2000, there were 55,996 M&A announcementsnet of divestitures, and the total dollar value offered is $6,130 billion. In comparison, there were 18,339 netannouncements and a total dollar value of $1,180 billion from 1983 to 1989. In addition, there were 64,910net announcements and a total dollar value of $5,854 billion from 2001 to 2007.