CEO Pay Gap and Mergers and Acquisitions

This research examines the relation between tournament-based incentives, which are proxied by the difference between a firm’s CEO pay and the median pay of the senior managers, and mergers and acquisitions (M&As). We find that tournament-based incentives are positively related to firm acquisition activities and acquirer stock and operating performance. Further analysis indicates that positive acquisition performance increases the likelihood of the CEO being promoted from inside the acquiring firm. Our evidence is consistent with the view that tournament-based incentives motivate acquirer managers to make greater efforts and take more risk that result in superior acquisition performance.