CEO Compensation and Returns to Public and Private Acquisitions: Testing the Shareholder Value Hypothesis

Academic Paper
Title	Executive Compensation and Acquisitions
Author	Ed Egan, Jim Brander
Status	In development
© edegan.com, 2016

Draft

There's an early draft, without tables called "CEO CompensationJB2.docx". It's in the dropbox (Dropbox\coauthoredprojects\ResearchWithJim\ExecCompAcqs) and in the main folder (E:\McNair\Projects\CompAcqs\). There's also a CEO.log file that details results run on the old dataset, for information only.

Database, dataset and scripts

The database is compacqs

The SQL script and input data is in:

Z:\compacqs\

The SQL script is:

BuildCompAcqs.sql

The STATA do file is Master.do and is in:

E:\McNair\Projects\CompAcqs\

The current version of the dataset is:

MasterV1-1.txt

Variables

The unit of observation is an executive's compensation year, or firm and (year-1). Each observation must have a CEO identifier, a year, and CEO compensation info. Each observation also must have lagged acquisition information, though many of these variables will be zero, and should have lagged firm level control variables.

CEO variables:
   Year - the year of the CEO's compensation package
   Execid - belonging to CEO in that year
   age - of ceo in year
   tenurefirm - tenure with firm in years (int) calc'd from joined firm date
   tenureceofromdate - tenure as CEO in years (int) cal'd from becameceo date
   tenureceo - tenure since first appeared as ceo (for firm)
   tenurecomp - tenure since first appeared in execcomp (for firm) to first appeared as ceo 
   tenurecfo - tenure since first appeared in comp as cfo (for firm) to first appeared as ceo 
   tenurecfocomp - tenure since first of cfo/comp to ceo (for firm)
   prevcfo - 0/1 (with firm)
   ceobefore -0/1/ (any firm in execcomp)
   gender - 1 for male, 0 for female
   salary - from execcomp
   bonus - from execcomp
   optionsfv - options fairvalue
   optionsrpt - options reported value
   optionsblk - options black-scholes values
   tdc1 - total compensation from execcomp

Acquistions (joined on cusip6, ayear s.t. ayear+1=year): 
   numacqs - number of acquisitions within year for the firm
   numacqspriv - number of private acquisitions within year for the firm
   numacqspub - number of private acquisitions within year for the firm
   car5tot - the total 5-day Cummulative Abnormal Return (0 when no acqs)
   car5av - the average 5-day CAR(0 when no acqs)
   valctot - sharesoutstanding (in millions?) x car5tot
   valcav - sharesoutstanding (in millions?) x car5tot
   sharesoutstanding - only available when their was >=1 acquisition
   hasacqs - 0/1 of there were any acqs within year
   transactionvalue - the total reported transaction value of acqs
   targetvalue - the total reported value (transaction, enterprise, or equity in that order of appearance) of the acqs

Firm (acquirer, joined on GVKEY, fyear s.t. fyear+1=year):
   fyear - fiscal year from CSTAT
   naics - as a string (for redundancy)
   naics2 - 2dg NAICS
   naics3 - 3dg NAICS
   state - name of state
   statenum - number assigned to states [0-61] as some non-states
   at -  total assets
   ppent - plant, property equipment net total
   ppegt - plant, property equipment gross total
   revt - sames as sales
   ni - net income
   acqi - current income from acquisitions in CSTAT
   acq - cost of acquisitions from CSTAT
   mktvalue - market value

CPI:
   deflator - for exec comp with 2010 as base year
   cpiavg - the average CPI for the compensation year
   deflatorlag - for fiscal/acq year with 2010 as base year
   cpiavglag - the average CPI for the fiscal/acq year

Notes from the draft

Execucomp data

Execuomp provides data on various characteristics of each CEO that can be used as explanatory variables for compensation, including age, sex, and experience.

Various compensation measures are provided, including salary, bonuses, and the value of option awards. We focus primarily on total compensation (variable TDC1 in Execucomp), which includes salary, bonuses, the value of option awards and other types of compensation.

Compustat data

We use Compustat data (also obtained through WRDS) for data on various firm-level explanatory variables, particularly firm size measures (employment and real plant and equipment) and industry identifiers (NAICS codes at the 2 digit and 3 digit level).

CPI data for deflating

We use annual data, converting compensation over time to real values using the CPI index as a deflator.

Old distribution from paper

After a small amount of data cleaning (consisting mainly of dropping observations for which data on important variables is missing) we are left with 6447 panels and 34,956 observations, implying an average tenure of about 5.4 years per CEO in our data.

For most observations (29,775), the number of acquisitions is zero. Exactly one acquisition occurs in 4,228 observations, exactly two occur in 1,122 observations, three occur in 391 observations, and in 310 observations there are four or more acquisitions. The data set contains 9,452 acquisitions overall, of which 8,211 are acquisitions of privately held companies and 1,241 are acquisitions of publicly traded companies.

In our primary analysis we therefore include observations (firm-CEO-year combinations) with more than acquisition. In such cases we consider two alternative measures of acquisition performance – the average abnormal return over all acquisitions in the year and the total abnormal return over all acquisitions. To see if using multiple acquisitions has an effect we can of course consider a subsample consisting only of observations with no more than a single acquisition.

Data Source Draws

COMPUSTAT

Query URL: https://wrds-web.wharton.upenn.edu/wrds/ds/comp/funda/index.cfm?navId=80

Execucomp

Query URL https://wrds-web.wharton.upenn.edu/wrds/ds/comp/execcomp/anncomp/index.cfm?navId=72

Saved Query: ExecCompForAcqsPaperV

Query spec:

 Data Request ID e0a8b1599f177e67
 Libraries/Data Sets comp/anncomp  /
 Frequency/Date Range ann / 1992 - 2017
 Search Variable TICKER
 Input Codes 
 all item(s) 
 -all-
 Conditional Statements n/a
 Output format/Compression tab /
 Variables Selected CONAME CUSIP GVKEY NAICS STATE EXECID EXEC_FULLNAME GENDER PAGE BECAMECEO CO_PER_ROL GVKEY JOINED_CO AGE BONUS CEOANN CFOANN OPTION_AWARDS_BLK_VALUE OPTION_AWARDS_FV OPTION_AWARDS_RPT_VALUE SALARY TDC1 TDC2 TITLEANN TOTAL_CURR YEAR

Note: We need GVKEY, CUSIP, and year to do the joins. NAICS and STATE can be supplemented by the COMPUSTAT and EXECUCOMP data.

Acquisition Data

This is currently taken directly from the last version of the Winner's Curse Dataset (see Z:\compacqs).

We need to rebuild this to include all of the times when we had multiple acquisitions on the same day. As we use various SDC dataset measure (like a public indicator, state, and naics) it isn't sufficient to just take the CAR5 and sharesoutstanding from the event regressions - we need to join it back to the SDC data first. We will then calculate car5tot and car5av and count private and public acquisitions by blowing out the data (so that the unit of obs is an acquisition, not an announcement day) and recalculating the aggregate variables.