Growth-promoting Bonuses and Mergers and Acquisitions

Abstract
Approximately one-third of U.S. top executives receive bonuses explicitly tied to firm size
measures like sales growth. We study how such “growth-promoting bonuses” influence
firms’ mergers and acquisitions (M&A) activities. We find that firms with such bonus
structures are more prone to make acquisitions — especially acquisitions of a scale that
help meet the bonus size target. Such acquisitions result in lower announcement returns
for acquiring firms and are more likely to destroy value. These lower returns can be
attributed to the selection of targets with lower synergies and, to a lesser extent, higher
premiums paid.