External fairness of executive compensation, institutional investor and M&A premium
Nankai Business Review International
ISSN: 2040-8749
Article publication date: 21 October 2021
Issue publication date: 3 February 2022
Abstract
Purpose
This paper aims to study the impact of external fairness of executive compensation on M&A premium, and examine the moderate role of institutional investors. The high M&A premium is the main factors that induce the huge impairment of listed companies’ goodwill and the plummeting performance. Executives are the decision-makers of M&As, and their decision-making process is inevitably affected by the psychological factors. In recent years, institutional investors have become an important external force that can affect the governance of listed companies.
Design/Methodology/Approach
The authors use M&A data of listed companies from 2008 to 2018 and use OLS regression to test the relationship between executive compensation fairness and M&A premium.
Findings
The results show that the lower the external fairness of executive compensation, the greater the M&A premium. Institutional investors can effectively reduce the impact of external compensation unfairness on M&A premiums. The mechanism tests show that executives' psychological perception of fairness induced by external unfairness reduces their motivation to work and prompts them to use high premium to seek alternative compensation incentives. Further examinations of executive characteristics and corporate characteristics show that the role of external unfairness in executive compensation in driving M&A premiums is more pronounced in companies with longer executive tenure, weaker executive reputation incentives and private property.
Originality/Value
This paper enriches the research on the pre-factors of M&A premiums from the perspective of executives’ psychological perception of fairness, provides evidence that institutional investors play a positive governance role and provides decision-making references for companies to take corresponding measures to reduce M&A premium risks.
Keywords
Acknowledgements
Funding: Key Project of the National Social Science Fund of China (19AGL010); Natural Science Fund of Shandong Province of China (ZR2019MG004); Qilu Cultural Talent Special Project of Shandong Province of China (19CQRJ02).
Citation
Pan, A., Wu, Q. and Li, J. (2022), "External fairness of executive compensation, institutional investor and M&A premium", Nankai Business Review International, Vol. 13 No. 1, pp. 79-99. https://doi.org/10.1108/NBRI-05-2021-0035
Publisher
:Emerald Publishing Limited
Copyright © 2021, Emerald Publishing Limited