Does Say-on-Pay Rule Affect M&A Decisions?

Abstract

This study investigates how the adoption of say-on-pay (SoP) regulation impacts the propensity and profitability of merger and acquisitions (M&A) activities with a sample of S&P 1500 firms (2005 – 2016). We examine both (a) macro-economic effect induced by the adoption of S&P regulation in 2011, impacting all firms across the board, and (b) firm-level effect due to variation in SoP voting approval percentage in different firms. We propose and examine two relevant hypotheses: (i) ‘SoP governance’ hypothesis – to explain the impact of SoP rule adoption, and (ii) ‘reliable CEO’ hypothesis – to explain the impact of SoP voting approval percentage. ‘SoP governance’ hypothesis predicts that in the post-SoP period, CEOs will be more cautious in pursuing M&A deals – which have a high risk of failure. This should lead to a lower probability of acquisition and better acquisition performance. On the other hand, ‘reliable CEO’ hypothesis proposes that CEOs with higher SoP voting approval percentage, enjoy more shareholder confidence and are encouraged to take risky ventures to increase shareholders wealth. This should lead to a higher probability of acquisition, with better acquisition performance. Our results find partial support for ‘SoP governance’ hypothesis – that SoP rule adoption is associated with a lower probability of acquisition but does not have any significant association with acquisition performance. While examining the effect of SoP voting approval percentage, we further find support for ‘reliable CEO’ hypothesis. Our results show that SoP voting approval percentage has a significant and positive association with acquisition probability and acquisition performance. Finally, we find that SoP voting results do not have any significant moderating effect on the relationship between (i) CEO incentive pay and M&A decisions, and (ii) CEO pay slice and M&A decisions.