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Managerial incentives and acquisitions: a survey of the literature

Melissa A. Williams (University of Houston – Clear Lake, Houston, Texas, USA)
Timothy B. Michael (University of Houston – Clear Lake, Houston, Texas, USA)
Edward R. Waller (University of Houston – Clear Lake, Houston, Texas, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 11 April 2008




The purpose of this paper is to review and summarize research into managerial incentives, merger activity, performance, and the use and structure of compensation to mitigate agency problems in the firm.


The authors discuss studies of size elasticity and compensation, pay for performance, changes in managerial compensation due to merger activities, incentives and risk taking, and the relationship between managerial risk aversion and acquisitions.


The paper identifies several prominent themes in the literature. First, size and performance both appear to be positively related to managerial compensation. There appears to be a strong relation between pay and performance, but results depend upon whether the pay measure includes all forms of compensation. With mergers, any merger gains seem to accrue to the acquired firm. It appears that acquiring managers can increase their pay by merging with other firms, and this is likely to happen in cases where shareholder returns are negative. Regarding managerial risk taking and compensation, it is likely that the sensitivity of a manager's equity‐based compensation (options, in particular) to changes in the total risk of the firm is an indicator of how willing managers will be to seek out more risk on behalf of shareholders.


This paper synthesizes a large body of research into an organized discussion of the issues relating to merger activity, managerial incentives, compensation, and pay for performance issues.



Williams, M.A., Michael, T.B. and Waller, E.R. (2008), "Managerial incentives and acquisitions: a survey of the literature", Managerial Finance, Vol. 34 No. 5, pp. 328-341.



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Copyright © 2008, Emerald Group Publishing Limited

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