David A. Becher

Bank Mergers, the Market for Bank CEOs, and Managerial Incentives

After a large bank merger the compensation of the surviving banks CEO often increases materially. Theories of executive compensation based on managerial productivity and optimal incentives suggest that changes in CEO compensation are related to the potential gains from merger. Alternatively, compensation gains might result from an increase in bank size regardless of whether the merger creates value. We examine mergers among billion-dollar banks in the 1990s and find results consistent with managerial productivity. Specifically, we show empirically that changes in CEO compensation after mergers are positively related to anticipated gains from merger measured at the announcement date. Other changes in the structure of compensation are also consistent with hypotheses based on managerial productivity and incentive restructuring.

Sources of Gains in Corporate Mergers: Refined Tests from a Neglected Industry

Our work provides refined tests of the source of merger gains in a neglected industry: utilities. Utilities offer fertile ground for analysis of traditional theories: synergy, collusion, hubris, and anticipation. Utility mergers create wealth for the combined firm, consistent with both the synergy and collusion hypotheses. To distinguish between these hypotheses, we study rival stock returns across dimensions related to collusion: deregulation, geography, and horizontal and withdrawn deals. We also find that the impact of mergers on consumer prices is consistent with synergy rather than collusion. Analysis of industry rivals that become targets also rejects collusion and is consistent with anticipation.

Bid Resistance by Takeover Targets: Managerial Bargaining or Bad Faith?

This paper examines management’s motives for rejecting takeover bids and the associated shareholder wealth effects. We develop several measures of initial bid quality and find a significant negative correlation between contested offers and bid quality. The likelihood of higher follow-on offers decreases in bid quality and is greater when targets have classified boards and CEOs have significant personal wealth tied to the transaction. Moreover, CEOs who fail to close high quality offers experience a significant rate of forced turnover. Overall, the results support a price improvement motive for contested bids.

Industry Shocks and Merger Activity: An Analysis of U.S. Public Utilities

We study the utility industry from 1980 to 2004 to discern the time series impact of industry shocks and their relation to mergers as modeled by Gort (1969) and Jensen (1993). Our sample period permits tests of the effect of utility deregulation in 1992 and related industry shocks on the rate of merger activity and the level and sources of the wealth changes from 384 utility mergers. We find the rate, size, geographic scope and operational focus of utility mergers all increase after deregulation and utility mergers create wealth for the combined firm. The announcement returns to the rivals of the merging firms decline between the pre- and post-deregulation periods and are larger for rivals that are future takeover targets. Announcement returns to rivals in the same geographic region as the target and bidder are no larger than returns to rivals not in the same region. In addition, the returns to rivals at the announcement of withdrawn deals are significantly positive. We also examine the relation of merger activity to electric utility pricing. Contrary to collusive or anti-consumer effects of mergers, we find that prices are significantly negatively related to industry concentration or merger activity. We interpret this evidence to be consistent with the synergy and anticipation hypotheses and inconsistent with the hypotheses that utility mergers are an outcome of bidder hubris or that mergers prompted by deregulation have enabled greater collusion in the utility industry.

Board Changes and the Director Labor Market: The Case of Mergers

Director selection is crucial in corporate governance, but little is known about the relative importance of individual director attributes in the selection process. We examine the motives for director selection using the empirical setting of mergers, which offers a well-defined pool of candidates considered and a discrete shock to a board’s monitoring and advising needs. We find that boards increase director expertise tied to these changing needs, even in cases with powerful CEOs that could opportunistically weaken board monitoring. Individual candidates with expertise related to changing board needs are significantly more likely to be selected for the post-merger board. In contrast, directors are appointed from outside of the well-defined labor pool when they possess more related expertise than candidates from the merging firms. Our evidence suggests that directors are selected to meet changing monitoring and advising needs.

Underwriter Choice When the Issuer Is an Underwriter

This paper examines the previously undocumented debt underwriting relationship for banks. Publicly-traded investment and commercial banks (“banks”) are unique in that they are the only firms capable of underwriting their own securities. Banks, however, hire a rival in nearly 30% of their debt issuances and do so extensively across bank size, quality, and type. The decision to use a rival is related to expertise, information sharing, as well as our newly-proposed bank-specific (distribution networks, capacity, and ranking) motivations and is costly to issuers. These results provide new evidence of banks’ underwriter choice and the pervasive use of rivals.

Congruence in Governance: Evidence from Creditor Monitoring of Corporate Acquisitions

We examine the impact of creditor control rights on corporate acquisitions, using covenant violations as an indicator of heightened creditor control. We show that private credit agreements frequently impose restrictions on borrower acquisition decisions. Following a covenant violation, creditors use their bargaining power to tighten these restrictions and limit acquisition activity, particularly deals expected to earn large negative announcement returns. Firms that do announce an acquisition while in violation of a covenant earn 1.8% higher stock returns, on average, with the effect concentrated among firms with weak external governance. We conclude that creditors and equity holders share congruent preferences to limit activity motivated by managerial agency conflicts.

Is There Performance-Based Turnover on Corporate Boards?

We document an economically significant relation between director turnover and prior firm performance. This relation manifests in idiosyncratic stock returns consistent with relative performance evaluation and the monitoring of actions attributable to directors. The director turnover-performance sensitivity increases substantially throughout the 2000s, and varies with a number of governance characteristics, most notably with the presence of an active external blockholder. Directors who exit firms following poor performance are significantly less likely to obtain new directorships in the future. In sum, the threat of replacement for poor firm performance has become an increasingly significant incentive for the directors of public corporations.

Are Firm-Advisor Relationships Valuable? A Long-Term Perspective

We examine long-term firm-advisor relations using an extended history of debt, equity, and merger transactions. Hard-to-value firms are more likely to maintain dedicated advisor relations (underwriters or merger advisors). Firms that retain predominantly one advisor over their entire transaction history pay higher underwriting/advisory fees, have inferior deal terms, and have lower analyst coverage relative to those that employ many advisors. When we condition on a firm’s information environment as a catalyst for long-term advisor retention, riskier firms obtain better terms when they utilize a variety of advisors, but informationally-opaque firms do not. Our results suggest that only some firms benefit from long-term advisor retention.

Do Acquirer CEO Incentives Impact Mergers

This paper examines the mechanisms by which acquirer CEOs are incentivized and their impact on merger decisions. We argue that the pre-merger structure of CEO wealth impacts a CEO’s risk tolerance and ultimately her willingness to undertake a merger as well as the framework of the deal. As the riskiness of CEO wealth increases (as measured by excess vega or cumulative option-based wealth), firms are more likely to become an acquirer, pay higher premiums, and experience lower post-merger performance. These results hold controlling for CEO overconfidence and cannot be attributed to firms altering incentives to induce CEOs to partake in mergers. Post financial crisis, we find both a shift in the composition of CEO pay and its relation to mergers. Overall, these results have important policy implications in the debate over optimal CEO pay as the structure by which CEOs are compensated appears to impact firm choices.