CEO pay slice and acquisitions in Australia: the role of tournament incentives

Luong, Hoa and Gunasekarage, Abeyratna and Shams, Syed (2022) CEO pay slice and acquisitions in Australia: the role of tournament incentives. International Journal of Managerial Finance. ISSN 1743-9132


Abstract

Purpose
This paper investigates the influence of tournament incentives, measured by Chief Executive Officer (CEO) pay slice (CPS), on the acquisition decisions of Australian firms.

Design/methodology/approach
This study applies ordinary least squares regression analyses to a sample of 1,429 acquisition observations announced by 986 unique Australian firms spanning the 2001–2015 period. Event study methodology was employed to capture the market reaction to acquisition announcements. Multinomial logit models, a two-stage least squares instrumental variable (IV) approach and propensity score matching (PSM) technique were performed for robustness and endogeneity correction purposes.

Findings
The results suggest that CPS has a positive and significant relationship with the announcement period abnormal return realised by acquirers, implying that executives are motivated to exert best efforts and support the CEO in making value-creating acquisitions. Further analyses reveal that management teams of high CPS firms demonstrate efficiencies in executing acquisitions. The positive relationship between the CPS and abnormal return is more pronounced in acquisitions of private targets, domestic targets and bidders with high-quality CEOs. These acquisitions make a significant contribution to the long-run performance of the firm, which provides support for the effort inducement hypothesis.

Practical implications
The study's empirical evidence implies that the strong governance environment in Australia and a highly monitored acquisition market and compensation contracts motivates executives to exert their efforts to make value-enhancing acquisitions.

Originality/value
This paper appears to be the first investigation that makes a link between CPS in different components (i.e. short-term, long-term and total pay) as proxy for tournament incentives and the outcomes of both public and non-public acquisitions in the Australian setting.


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Item Type: Article (Commonwealth Reporting Category C)
Refereed: Yes
Item Status: Live Archive
Additional Information: Published online: 7 September 2021. Permanent restricted access to ArticleFirst version, in accordance with the copyright policy of the publisher.
Faculty/School / Institute/Centre: Current - Faculty of Business, Education, Law and Arts - School of Business (18 Jan 2021 -)
Faculty/School / Institute/Centre: Current - Faculty of Business, Education, Law and Arts - School of Business (18 Jan 2021 -)
Date Deposited: 09 Sep 2021 01:20
Last Modified: 09 Sep 2021 01:20
Uncontrolled Keywords: tournament incentives, CEO pay slice, acquisition, market reaction, acquisition efficiency
Fields of Research (2008): 15 Commerce, Management, Tourism and Services > 1599 Other Commerce, Management, Tourism and Services > 159999 Commerce, Management, Tourism and Services not elsewhere classified
15 Commerce, Management, Tourism and Services > 1502 Banking, Finance and Investment > 150201 Finance
15 Commerce, Management, Tourism and Services > 1502 Banking, Finance and Investment > 150299 Banking, Finance and Investment not elsewhere classified
Fields of Research (2020): 35 COMMERCE, MANAGEMENT, TOURISM AND SERVICES > 3599 Other commerce, management, tourism and services > 359999 Other commerce, management, tourism and services not elsewhere classified
Socio-Economic Objectives (2008): B Economic Development > 90 Commercial Services and Tourism > 9001 Financial Services > 900199 Financial Services not elsewhere classified
Identification Number or DOI: https://doi.org/10.1108/IJMF-06-2021-0292
URI: http://eprints.usq.edu.au/id/eprint/43523

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