Essays in mergers and acquisitions

This dissertation studies mergers and acquisitions in which managerial compensation may give right to problems between principal and agent. In chapter 2, I focus on firms formed for the sole purpose of making an acquisition. These firms, also known as Special Purpose Acquisition Companies (SPACs), often exhibit a unique compensation system for their managers. I document that in SPACs managers do not receive any compensation unless these SPACs complete an acquisition. I test whether such compensation structure prompts SPAC managers to engage in bad acquisitions. My findings indicate that, because of the way SPACs are regulated and monitored, these companies make better acquisitions and pay a lower price for their targets. The third chapter studies the effects of golden parachutes to chief executive officers (CEOs) of firms that receive takeover bids. A key innovation in this study is that it addresses the relative importance of parachutes to CEOs. That is the effect of parachute payments on the personal wealth of the chief executives. I find that the size of parachutes is an inverse function of the takeover premiums paid for publicly traded targets. The results of this chapter contribute to the debate on the effectiveness of the compensation contract given to top managers in public companies. The last chapter studies companies that grant their CEOs unscheduled stock options during private merger negotiations. The results indicate that these last-minute options substitute for golden parachutes and compensate target CEOs for benefits they forfeit because of the merger. Targets granting unscheduled options are more likely to be sold but they also earn lower premiums. In contrast, firms that buy targets that engage in this compensation practice earn higher returns upon their merger announcement. Together, these results imply a transfer of wealth from target shareholders to bidder shareholders. The evidence in this chapter adds to the literature studying the effects of acquisition related exit compensation to top managers of firms that are taken over. JEL classification. G34 Keywords. Acquisitions; Executive Compensation; Corporate Governance.