Is M&A Self-Dealing in the Context of Peer Benchmarking of CEO Pay?

Abstract

We define two effects: (a) percentage difference between median CEO pay of compensation peers and their counterfactual peers (Peer pay effect, PPE), and (b) percentage difference between focal firm CEO pay and the median CEO pay of their compensation peers (CEO pay effect, CPE). We find a negative relation between M&A announcement period abnormal returns and pre-announcement PPE. The PPE (CPE) is lower (higher) in acquiring years relative to non-acquiring years. We show that the lower PPE is consistent with better governance and higher CPE is due to benchmarking against peers with higher median CEO pay and for completing acquisitions.