Mergers Benefit CEOs Financially, Regardless of Success – Sauder School of Business Study


VANCOUVER, BC – The conflict of interest between corporate management and shareholders has long been noted, and a new study published in The Journal of Finance – from the Sauder School of Business at the University of British Columbia and the University of Washington -- contributes to the debate by examining mergers and acquisitions data of publicly traded American companies from 1993 – 2000. The study assesses how CEO incentives to pursue mergers are affected by the compensation policies that follow them.

The study finds that following a merger, CEO pay is unaffected by poor stock performance, but increases with positive performance, allowing personal financial gains for CEOs in both cases. Even in mergers where shareholders lost money, 75 percent of CEOs studied ended up in better economic positions than they were prior to the acquisition. As a result, the study argues, there are significant incentives for CEOs to advocate mergers even when the outcome is likely to prove unprofitable for the company.

"In the past, CEOs suffered along with shareholders through the effect of their actions on their stock portfolios,” say Jarrad Harford and Kai Li, authors of the study, arguing that more recent practices, such as using large grants of new options and restricted stock to supplement CEO compensation, gives CEOs “incentives to undertake an acquisition as their post-acquisition total pay and overall wealth increase substantially."

These incentives hold equally true for unprofitable mergers, giving CEOs considerable reasons to pursue acquisitions regardless of the potential outcome. Despite these findings, the study notes that some companies with stronger boards do allow CEO compensation to fall with negative stock performance after mergers.

Kai Li is the W.M. Young Professor of Finance at the University of British Columbia Sauder School of Business and can be reached for questions at

Jarrad Harford is an Associate Professor of Finance at the University of Washington, Seattle. He can be reached for questions at

For more information, contact:

Derek Moscato 
Sauder School of Business
Tel: 604-822-8345