An Analysis of Managerial Incentives in Mergers and the Effects of Incentive Compensation Contracts on Manegerial Decisions and on Shareholder Value

Do compensation contracts really matter? A substantial number of firms engage in conglomerate mergers which are diversifications to reduce risks. They can no longer undertake effective merger activities with expectation of economic benefits, as some managers may want to prevent corporate sharks from taking over their firms. Merging the related firms would result in market efficiency, therefore, merger activity would improve asset deployment and boost stock values. This thesis is based on event study to focus-on the analysis of managerial incentives in mergers and the effects of incentive compensation contracts on managerial decisions and on shareholder value. Chapter 1 provides the main theories of mergers — the corporate motives for mergers and how markets respond to them. Chapter 2 focuses on managerial motives in capital investment, and the association of incentive compensation contracts with managerial decisions in capital investment. Then, Managerial incentives on both sides of the mergers are looked at. In Chapter 3 managers of the acquiring firms are discussed — those making the investment decisions to determine the relationship of compensation contracts and mergers. In charter 4 managers of target firms are discussed, focusing on anti-takeovers . Chapter 5 concludes with some brief general comments about mergers, and trace the effects of incentive compensation on managerial decisions and shareholder value. After review this paper, readers will realize that through the incentive compensations managers will be motivated to undertake the effective merger activities or other capital investment as well as lessen target firms\u27 managers from anti-takeover strategies. Reaction of investors to mergers as well as compensation plans are examined