CEO Inside Debt Holdings and Bank M&As

• In Event: Financial Accounting and Reporting I

Abstract

This study examines whether and how inside debt holdings in CEO compensation contracts influence M&A decision making in the banking industry between 2006 and 2007. We find strong evidence that bank CEOs respond to inside debt incentives embedded in their compensation contracts when engaging in M&As. While banks are born risk-takers and generally take more risk than other industrial firms, high inside debt causes bank CEOs to mitigate excessive risk-taking and search for undervalued targets by purely paying cash. Because inside debt ties the fortune of bank CEOs with long term bank value and moderates excessive risk taking, the stock market views such acquisitions as more profitable and react favorably to those announcements. Our results are robust to controlling for both CEO pay-performance sensitivity (delta) and CEO pay-risk sensitivity (vega).

Authors

• Claire Jinqiu Yan, University of Arkansas at Little Rock

• Ziyun Yang, University of Houston–Victoria