Growth-promoting Bonuses and Mergers and Acquisitions

One-third of U.S. top executives have bonuses that are explicitly linked to growing the firm's size. We study how such "growth-promoting bonuses" influence firms' mergers and acquisitions (M&A) activities. We find that executives with these bonus incentives are more likely to do M&A deals - especially acquisitions in a size range consistent with meeting their bonus targets. We use shocks to the distance from bonus targets that are caused by plausibly exogenous exchange-rate changes to support a causal mechanism behind these findings. Abnormal returns around M&A announcements are on average negative for acquirers with growth-promoting bonuses, primarily due to lower merger synergies. Despite these negative returns, the bonus payouts are large enough such that executives still experience a net monetary benefit when they achieve their performance targets using mergers.