Investor Attention, Managerial Incentives, and M&As

Abstract

This thesis studies mergers and acquisitions (M&As) through three essays. Specifically, the first essay examines the effects of investor attention on capital market reactions to early announcements in M&A. The key finding is that an early announcement that can attract greater investor attention is associated with higher short-term abnormal returns. However, this relation is reversed after merger integration, and early-announced deals that attract greater investor attention are associated with a lower long-term firm value. For early-announced deals with low investor attention, neither the boosting effect of the short-term value effect nor the price reversal in the long run exists. My findings support the price pressure hypothesis for the market reaction to early announcements. The second essay explores how chief executive officers (CEOs)’ incentive horizon would influence firms’ early-announced deals. In particular, I examine the effect of CEOs' incentive horizon on the likelihood of early announcements, CEOs’ equity sales following early announcements, and the performance of early-announced merging firms. I find that compared to long-horizon CEOs, CEOs with short incentive horizons are more likely to announce a deal early (before signing definitive agreements) and sell more shares following early announcements. Early-announced deals initiated by short-horizon CEOs experience worse post-merger abnormal operating performance. Furthermore, these short-horizon CEOs are more likely to be replaced after early-announced deals. Overall, my findings highlight the importance of executive compensation horizon in M&As. In the third essay, I investigate how target firm CEOs' industry tournament incentives (ITIs) would affect the probability of target-initiated M&A deals, and the chances of their subsequent labor market retention in the combined firms. I find that the probability of selling firms via deal initiation increases with target firm CEOs’ ITIs, and this positive relation is more pronounced when target firm CEOs are younger or more talented, and have longer tenures. Furthermore, target firm CEOs with stronger ITIs are more likely to retain positions in the combined firms. My findings suggest that ITIs drive CEOs to sell their firms by initiating M&A deals and reap private benefits in the managerial labor market.