CEO Compensation Contracts, Insider Trading, and Exchange Mediums in Mergers and Acquisitions
Date Issued
2006
Date
2006
Author(s)
Yeh, Hsin-Yen
DOI
en-US
Abstract
This paper intends to justify and explain the phenomenon that an acquiring firm’s share price tends to fall but a target firm’s shareholderstend to benefit because of the takeover. Besides, it considers the relationship between insider trading, productive efficiency, and the likelihood of subsequent takeover success when corporate insiders
can collude. We analyze the interactions between insiders' incentives to coordinate their trades and the explicit managerial compensation contracts in a two-audience signaling model where an acquiring firm’s
stock price reveals information to a target firm’s management, which can take defensive strategies to affect the likelihood of success when the acquiring firm attempts to take over the target firm. We show that concerns for the takeover gains may affect both the informational ef-
ficiency in the stock market and the pre-takeover incentive contract offered to the CEO’s of the acquiring firm. The theory offers a rational explanation to the well documented phenomenon that the price response to an announcement of takeover by the acquiring firm tends
to be negative but target firm’s shareholders tend to benefit because of the takeover. A lower contractual bonus may indicate a higher probability that the takeover may succeed and a price drop for the acquiring firm’s stock. The choice of exchange medium depends on both the expected takeover gains and the expected insider trading profits.
Subjects
經理人報酬契約
內部人交易
購併媒介
Compensation Contracts
Insider Trading
Exchange Mediums
Type
thesis
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