Can long-term performance plans mitigate the negative effects of stock consideration and high cash for acquirers?

Derek Oler, James F. Waegelein

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

Abstract

Following Travlos (J Finance 42: 943-963, 1987), Loughran and Vijh (J Finance 52: 1765-1790, 1997), Harford (J Finance 54: 1969-1997, 1999), and Oler (Rev Acc Stud 13: 479-511, 2008), we investigate whether acquisitions involving stock consideration and acquirers with high cash levels are associated with poor performance or not. In addition, we investigate whether including a long-term performance plan in top management's compensation package can mitigate these negative effects. We find that acquirers with a long-term performance plan are less likely to hold a high cash balance and are less likely to use stock consideration, thus avoiding scenarios that are more likely to be value-destructive. Even if an acquirer with a long-term performance plan carries a high cash balance or uses stock, we find that the plan is associated with improved fundamental performance; however, this relationship does not flow through to improved post-acquisition returns.

Original languageEnglish
Pages (from-to)63-86
Number of pages24
JournalReview of Quantitative Finance and Accounting
Volume37
Issue number1
DOIs
StatePublished - Jul 2011

Keywords

  • Compensation
  • Mergers
  • Performance

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