Association between Bid Premium for Corporate Acquisitions and Executive Compensation

This study empirically tests the argument that the magnitude of bid premium is influenced by the executivesʹ self-interest of maximizing their compensation. We evaluate the compensation maximization motivation by examining the association between the magnitude of bid premium and change in CEO cash compensation (salary plus cash bonus) from the pre-acquisition to post-acquisition period. The results, based on 646 mergers/acquisitions from 1994 to 1998, support the expectation that the bid premium is positively associated with the change in CEO cash compensation. The positive association between bid premium and CEO cash compensation is, however, moderated when the CEO has shareholdings in the firm and especially when the acquiring firm undertakes size-contraction activities during the post-acquisition period.