Changes in the Incentive Contracts of Takeover Targets After Merger Failures

This article investigates the changes in and the impacts of the incentive contracts of target firms that survived takeover attempts. Managers of unsuccessful takeover targets that performed poorly prior to takeover attempts received lower compensation and severance payment relative to their counterparts in successful takeover targets, and they benefited less from the completion of the acquisitions. Following the failure of the attempted bids, target firms improved their executives’ compensation packages and exhibited better subsequent firm performance with stronger pay–performance sensitivity. The compensation change was more evident in firms with weaker corporate governance structures before the takeover attempts. The evidence suggests that the external takeover market can have positive impacts by invoking internal control mechanisms, even without a successful merger.