The Impact of CEO Pay on M&A Decision-making: A (Dodd-) Frank Assessment of Executive Compensation Practices

Astrid Ladefoged Egmose & Emma Caroline Jaksland

Student thesis: Master thesis


The severe and market-wide downturn experienced in the Financial Crisis of 2007-2009 led regulators and investors alike to question whether executive interests were properly aligned with those of shareholders. This study explores whether the regulatory response in the U.S., Subtitle E on executive compensation in the Dodd-Frank Act of 2010, had the desired effect on executive interest alignment as proxied by merger and acquisition (M&A) decision-making quality. The study adds to the extant literature by evaluating whether already established relationships between executive compensation and M&A held up specifically under the partial implementation of the Dodd-Frank Act’s Subtitle E. Short-term cumulative abnormal returns following M&A announcements and the premiums paid for said deals are used to identify changes in interest alignment across a pre-crisis period and two post-Dodd-Frank Act periods. Employing OLS regression analysis, correlations between individual compensation components and merger and acquisition behavior are investigated and compared across the three periods to establish whether changes in residual losses from M&A are indeed attributable to changes in compensation. Although mean difference tests (one-way ANOVA F-tests and Student’s t-tests) show material changes in compensation components were seen after the implementation of the Dodd-Frank Act, our results show that improvements in M&A behavior are generally not attributable thereto as otherwise held by parts of the literature. It is suggested that the improvements in M&A decision-making are instead a result of temporary changes in executive sentiment and levels of overconfidence. These results have interesting implications for compensationsetting and governance regulations on an international scale. Several other countries are implementing similar provisions to those included in the Dodd-Frank Act. Say on Pay, for example, is currently garnering remarkable international popularity in different formats. Yet our results do not indicate that the studied provisions commanded clear improvements in interest alignment after their implementation

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2018
Number of pages140
SupervisorsCaspar Rose