CEO power, M&A decisions, and market reactions

In this study we examine the relationship between CEO power, corresponding acquisition activities and market reactions to mergers and acquisitions (M&A) announcements with a Canadian M&A dataset (1997–2005). We use CEO excess pay as a proxy for CEO power. Our empirical results show that the market reactions to M&A announcements are not related to CEO power. It implies that powerful CEOs do not necessarily make value destroying acquisitions. Our results further show that CEO power levels are significantly higher for acquiring firms compared to the CEOs of non-acquiring firms. In other words, CEOs with more relative power make more acquisitions. Such acquisitions will increase the size of the firm and will allow CEOs to demand a higher compensation level for managing larger asset pools and to derive higher performance incentives that are also generally tied to firm size.

► We model the influence of CEO power on compensation received by a CEO.
► We examine how CEO power affects acquisitions/mergers by firms.
► Powerful CEOs do not necessarily make value destroying acquisitions.
► CEOs with more relative power make more acquisitions.
► CEO compensation increases for managing larger asset pools.