Growth-promoting Bonuses and Mergers and Acquisitions

One-third of U.S. top executives have bonus incentives that are explicitly tied to the firm's size. We study how such "growth-promoting bonuses" influence firms' mergers and acquisitions (M&A) activities. We find that firms with bonus structures that promote growth are more prone to make acquisitions—especially acquisitions of a scale that help meet the bonus size target. We use shocks to sales from plausibly exogenous exchange-rate changes for exporting firms to identify these effects. Acquisitions by firms with growth-promoting bonuses have significantly lower abnormal returns, destroying value for the acquirers on average. These lower acquirer returns can be attributed to the selection of targets with lower synergies and, to a lesser extent, higher premiums paid. The growth-promoting bonuses tend to be sufficiently large such that—despite negative acquirer returns—the net monetary effect for executives who meet their sales bonus targets with a merger remains significantly positive.