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

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Academic Paper
Title CEO Compensation and Returns to Public and Private Acquisitions: Testing the Shareholder Value Hypothesis
Author Ed Egan, Jim Brander
Status Working paper
© 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

To do

  • Spec and build summary statistics and regression tables

Same Day Acquisitions

We need to solve the multiple acquisitions on a single day problem. The result needs the variables listed for acquisitions below (crucially including pub/priv indicator, CAR5, sameday indicator, sharesoutstanding, with a cusip-year key).

An outline of a process to do this:

  • SDCv2 is the import with some simple exclusions and basic processing 49031 - but it was likely overwritten and became 40216. A rebuild from SDCBase appears the replacement but this seems to have thrown out same day acqs.
  • We therefore need to go back to the raw import of SDC_MA_Oct10v4-fixed-normal.txt into table "SDC".
  • Load table prc from backup: SHOUT appears to have come from prc, which in turn came from CRSPRelNOInc. *Load table CRSPRelNOInc: this a base table for both estimation and event window builds.
  • Recode some queries from the previous work:
    • We would need to calc day number again for SDC, which would mean bringing in the dayno table.
    • Then we'd need to create new estimation data for the missing records: acq_cusip, date_announced, acqkey, dayno, avg(ret) as ret, primex, vret, eqret, reldayno, retdayno (see EstimationBase) - but maybe this time take SHOUT with you!
  • Run the estimation (using script ???.do) and build a new estimationtotal file and import it in estimationoutput
  • Recode some queries from the previous work:
    • Build a new EventBase, and everything in CRSP_TABLE.sql through to Flatter
    • Join this to EstimationOutput, calculate the abnormal returns and then CARs.
  • Finally join all of this mess back to the data that we already have. We may need to recompute targetit and targetvc.

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.

ID variable:
   ceofirmid - a unique id number for each ceo-firm pair. CEOs may serve as CEOs of more than one firm. This addresses this issue.
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 
   prevcfo - 0/1 (with firm)
   ceobefore - 0/1 (with 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
   histyears - the number of years the CEO has an acquisition record with the firm
   prevacqpub - the number of previous acquisitions made by the CEO (for the firm) of public targets
   prevacqpriv - the number of previous acquisitions made by the CEO (for the firm) of private targets
   prevacq - the number of previous acquisitions made by the CEO (for the firm)
   prevacqit - the number of previous acquisitions made by the CEO (for the firm) of IT targets
   prevacqvc - the number of previous acquisitions made by the CEO (for the firm) of IT 
   ceoacqswformerfirm - 1/0 to indicate whether the CEO has an acquisition history from a previous firm
   numtimesceo - the number of times a CEO has been a CEO to date in the data
   ceototdur - the total number of years of the CEO has been a CEO to date
   ceoprevacqpub - the CEO's total acquisitions of public firms whilst CEO with previous firms
   ceoprevacqpriv - the CEO's total acquisitions of private firms whilst CEO with previous firms
   ceoprevacq - the CEO's total acquisitions whilst CEO with previous firms
   ceoprevacqit - the CEO's total acquisitions of IT firms whilst CEO with previous firms
Acquisitions (joined on cusip6, ayear s.t. ayear+1=year): 
   numacq - number of acquisitions for the firm year
   numacqpriv - number of private acquisitions for the firm year
   numacqpub - number of private acquisitions for the firm year
   numacqit - number of IT acquisitions for the firm year
   numacqvc - number of VC-backed acquisitions for the firm year
   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
   numstockswap - number of acquisitions that involved a stock swap
   anystockswap - 1/0 for if acquisitions involved a stock swap that firm-year
   numterminationfeeacquiror - number of acquisitions that involved an acquirer termination fee
   numterminationfeetarget - number of acquisitions that involved an acquirer target fee
   numtbalancesheetprivate - number of acquisitions where the target's balance sheet is private
   numtincomestatementprivate - number of acquisitions where the target's income statement is private
   pcstock - the average percentage of stock in the payment for acquisition targets that year
   pccash - the average percentage of cash in the payment for acquisition targets that year
   drivingdur - the average driving duration to acquisition targets that year
   distance - the average driving distance to acquisition targets that year

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
   agovgoldenparachute - 0/1 for the CEO has a golden parachute (many missing)
   agovlimitabilityactbywritconsent - 0/1 whether governance has limited shareholders ability to act by written consent (many missing)
   agovmajvoterequirement - 0/1 for whether board members are elected on majority or plurality, which matters for uncontested seats (many missing)
   agovresignrequiredonmajorityvote - 0/1 "Indicates that a director is required to submit his/her resignation upon failing to receive support from a majority of votes cast (which, typically, the board may chose to accept or reject)." (many missing) 
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.