Federal Dposit InsuranceCorporation• Center for Financial Researchh
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2009-03
Pay for Performance?
CEO Compensation and Acquirer Returns in BHCs
December 2008
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2009-03
Pay for Performance?
CEO Compensation and Acquirer Returns in BHCs
December 2008
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Pay for Performance?
CEO Compensation and Acquirer Returns in BHCs
Kristina Minnick
Bentley College
Haluk Unal
University of Maryland and Center for Financial Research, FDIC∗
Liu Yang
Anderson School of Management, UCLA
Abstract
We examine the impact of managerial incentives on acquisitions in the banking industry. We find that
banks whose CEOs have higher pay-for-performance sensitivity (PPS) are less likely to engage in value-
reducing acquisitions. Conditional on engaging in acquisitions, those higher-PPS banks have significantly
better announcement returns: on average these banks outperform the acquires in the lower-PPS group by
1.2% in a three-day window around the announcement. The positive market reaction can be rationalized
by long-term performance. Following acquisitions, banks with high PPS experience greater improvement
in their operating performance as measured by ROA.
Keywords: Pay-for-Performance Sensitivity, CEO Compensation, Acquirer Returns, Bank Mergers
JEL Classification: G34, G21
∗Corresponding author, Robert H. Smith School of Business, University of Maryland, College Park, MD 20742. We thank
the following for their helpful comments and suggestions: Paul Kupiec, Santiago Carb-Valverde, Kim Gleason, as well as
seminar participants at Anderson School, UCLA, Federal Deposit Insurance Corporation, School of Economics and Finance at
the University of Hong Kong, and the 2007 FDIC/JFSR Mergers and Acquisitions of Financial Institutions Conference.
1
CEO Compensation and Acquirer Returns in BHCs
Kristina Minnick
Bentley College
Haluk Unal
University of Maryland and Center for Financial Research, FDIC∗
Liu Yang
Anderson School of Management, UCLA
Abstract
We examine the impact of managerial incentives on acquisitions in the banking industry. We find that
banks whose CEOs have higher pay-for-performance sensitivity (PPS) are less likely to engage in value-
reducing acquisitions. Conditional on engaging in acquisitions, those higher-PPS banks have significantly
better announcement returns: on average these banks outperform the acquires in the lower-PPS group by
1.2% in a three-day window around the announcement. The positive market reaction can be rationalized
by long-term performance. Following acquisitions, banks with high PPS experience greater improvement
in their operating performance as measured by ROA.
Keywords: Pay-for-Performance Sensitivity, CEO Compensation, Acquirer Returns, Bank Mergers
JEL Classification: G34, G21
∗Corresponding author, Robert H. Smith School of Business, University of Maryland, College Park, MD 20742. We thank
the following for their helpful comments and suggestions: Paul Kupiec, Santiago Carb-Valverde, Kim Gleason, as well as
seminar participants at Anderson School, UCLA, Federal Deposit Insurance Corporation, School of Economics and Finance at
the University of Hong Kong, and the 2007 FDIC/JFSR Mergers and Acquisitions of Financial Institutions Conference.
1