Pay for Performance? CEO Compensation and Acquirer Returns in BHCs Kristina Minnick, Bentley College Haluk Unal, University of Maryland and FDIC CFR Liu Yang, UCLA

2 CEO Compensation in BHCs

3 Pay-for-Performance Sensitivity Change of the CEO's wealth (in $000s) given a 1% change in stock price

4 Histogram of PPS

5 CEO with the Highest Total Compensation (by Year)

6 Our Paper Research Question –Does higher pay-for-performance sensitivity (PPS) lead to value-enhancing managerial effort? Application –Mergers and acquisitions Tests –Decisions to acquire –Market reaction: announcement returns to stock- and bond-holders –Change of operating performance after mergers

7 Related Literature Corporate governance and acquisitions –Datta, Iskandar-Datta, and Raman (2001) –Harford and Li (2007) –Falato (2007) –Masulis, Wang, and Xie (2007) Governance in banks –Bliss and Rosen (2001) –John, Mehran and Qian (2007) –Adams and Mehran (2003)

8 Our Data Completed acquisitions in the banking industry as identified from the SDC Platinum in the period of 1990 to 2005 Data available –Financial data from Compustat Bank and Call Reports –Stock prices from CRSP –Compensation data from ExecuComp Final sample –178 deals made by 65 acquiring BHCs –The control sample contains 700 bank-years that are not related to M&A Robustness check –Comprehensive governance dataset with: board structure, anti-takeover provisions, and institutional ownership –Bond return data from LBBD

9 Dependent Variable: 1: Acquire=Y 0: Acquire=N Probability to Acquire (Table IV)

10 Probability to Acquire –Banks with low PPS are more likely to acquire, controlling for other characteristics Banks in the first quartile of PPS are 24% more likely to acquire as compared to banks in the last quartile Moving from high-PPS group (mean + stdev) to low-PPS group (mean – stdev) lowers the acquisition probability by 37%

11 Acquirer Announcement Returns

12 Acquire Returns by PPS Group The difference in CAR between Low- and High- PPS group is 71bps.

13 Stock Returns (Table 7) One standard deviation increase of PPS will increase CAR by 0.51% Dependent Variable: CAR(-1,1)

14 Bond Returns (Table 9) Dependent Variable: BAR(-1,1) High PPS also benefits bond- holders!

15 Change of Operating Performance (Table 10) Acquirers with high pre- acquisition PPS also improve more in their operating performance.

16 Conclusion High pay-for-performance sensitivity lead to value-enhancing mergers –Banks with high PPS are less likely to acquire –Market react positively to acquiring banks with high PPS –Following acquisitions, acquirers with high pre- acquisition PPS improve more in operating performance