Does independent director compensation affect M&A performance?

MSc thesis

Does independent director compensation affect M&A performance?

Name: Robert van Bentum Student number: 1147857 Thesis supervisor: Máté Széles Date: 25-06-17

Word count: 20511

MSc Accountancy & Control, specialization Accountancy Faculty of Economics and Business, University of Amsterdam

Statement of Originality

This document is written by student Robert van Bentum who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

Abstract

This thesis examines the relation between independent director compensation and merger and acquisition performance, measured as four-week acquisition premium. Regarding the compensation of board of directors, most studies examine the relation of director compensation and its effects, but only a few pay attention to the compensation of independent directors. The appearance of independent directors on the board is very important these days. Due to scandals (Enron, WorldCom) and a financial crisis, the role of independent directors is often criticized (Calkoen, 2012). They should perform their monitoring and advising tasks on management in the most objective way. The independent directors are involved in decisions that could affect the shareholders’ value (Matolcsy et al., 2004). One of the decisions that has a significant impact on shareholders’ value is merger and acquisition. The independent director needs to ensure that the M&A is in line with the interests of the shareholders and not the personal incentives of management.

I find that there is no relation between M&A performance, measured as four-week acquisition premium, and independent director compensation. This could indicate that the compensation for independent directors does not influence their role in merger and acquisition decisions and the premium paid for the acquired firm. The results confirm the objective role of the independent directors in mergers and acquisitions.

Contents

1. Introduction ... 5 2. Literature ... 9 2.1 Agency theory ... 9 2.2 Optimal Contracting theory ... 10 2.3 Role Board of Directors ... 10 2.3.1 Incentives for independent director ... 13 2.4 Director compensation ... 16 2.4.1 Cash pay-out ... 17 2.4.2 Stock ... 18 2.4.3 Stock options ... 19 2.5 Determinants of independent director compensation ... 20 2.6 Merger and Acquisition ... 23 2.6.1 Definition M&A ... 23 2.6.2 Drivers M&A ... 24 2.6.3 Impact of M&A ... 24 2.6.4 What affects M&A outcomes ... 25 2.6.5 Role of independent directors on M&A ... 27 2.7 Hypothesis development ... 29 3. Methodology and Data set ... 33 3.1 Data collection & sample ... 33 4. Results and empirical findings ... 39 4.1 Descriptive analysis ... 39 4.2 Correlation analysis ... 42 4.3 Regression analysis ... 45 4.3.1 Alternative analysis ... 49 5. Discussion and limitations ... 51 6. Further research ... 54 7. References ... 55 8. Appendix ... 62 8.1 Fama and French (1997) 10 industry classification ... 62 8.2 Alternative regressions test ... 63

1. Introduction

This thesis examines if there is a relation between the independent director compensation and the merger and acquisition performance (i.e. the four-week acquisition premium). The role of independent directors on the board of directors has been questioned and criticized quite some times during the last three decades (Calkoen, 2012).

The independent director’s role is very important in the board of directors. Independent directors are appointed to align the interests between management and shareholders, in order to provide the highest possible shareholders’ value (Matolcsy et al., 2004). Decisions regarding M&As could have a significant influence on the shareholders’ value. I examine the influence of independent director compensation on the performance of M&As. I separate the compensation into total, cash, stock, and option compensation.

The M&A performance will be measured with the method of Datta et al. (2001), which looks at the relative premium paid. This is the relative price paid per share minus the share price of the acquired firm one month before the acquisition was announced. To my knowledge, there has not been any research on this specific subject yet.

The role of independent directors in the board has changed during the last couple of decades. According to Higgs (2003) the role of the board assesses the overall direction and strategy of the business, representing the shareholders’ interests. The board is divided into a (CEO/executive) director, chairman and independent directors. Each member has his own responsibilities in the board, the director is involved in the day-to-day operations of the company and is the face of the company. The independent directors are monitoring and advising the work of the directors and management and ensures that they operate on behalf of the interests of the shareholders. The duty of the chairman of the board is to organize and maintain the board (meetings) and to communicate the latest updates of the business operations to their shareholders (Higgs, 2003).

Due to scandals, such as Enron and WorldCom, and the financial crisis in 2008 the monitoring and controlling duty of the board of director is questioned. This led to public scrutiny about the current corporate governance code (Mendes, 2015). There was need for more supervision on the board of directors to improve the monitoring and supporting role of independent directors. All over the world countries try to improve their corporate governance codes (e.g. the government in the US took action through the use of the Sarbanes-Oxley Act (Sarbanes-Oxley Act, 2002) and the NYSE (New York Stock Exchange) listing rules and in the UK, they introduced the Combined Code (2003). In this thesis, I focus on the US independent director compensation in the period 2008-2015, because after the scandals of

Enron, WorldCom and the financial crisis in 2008, the role of board of directors has become very important. They have got more responsibilities in the company and their compensation has increased significantly.

In 2002, the US introduces the Sarbanes-Oxley Act (Sarbanes-Oxley Act, 2002), subsequently NYSE and NASDAQ (National Association of Securities Dealers Automated Quotations) and both updated their rules and standards about the boardroom and the dynamics. Nowadays listed companies need to have a fully independent audit committee that exists of outside directors and a compensation committee full of independent directors. Furthermore, ‘’independence’’ has a broader and stricter definition. They also need to apply more measures for the board in order to act independent and there also has to be a majority of independent directors on board (Calkoen, 2012). These are some of the important changes that were introduced. In the last decades, the majority of the board has changed significantly, according to Calkoen (2012), the percentage of independent directors on board increases from 20% in 1950 to 75% in 2005. The results of Horstmeyer (2011) also show that at the end of the 1990s, 80% of the board consist of outside directors and that the CEO was the sole insider in nearly half of all firms.

Thus, the role of an independent director is to monitor and advise the directors and management. The independent director will monitor if management is not making decisions for his own purpose, but only for the purpose of the company (Johnson, 1996). Fama and Jensen (1983) state that the independent directors are appointed to try to reduce the agency costs of the firm.

Prior research in the corporate governance literature focusses more on compensation of directors (Brick et al., (2006) Faleye, (2011) Hu, (2011) Murphy (2012)). Little research has been done on independent director compensation even though their compensation is sometimes greater than the compensation of a CEO and the independent directors mostly provide the majority of the board (Bugeja et al., 2016). Bugeja et al. (2016) looks at the determinants of the levels and changes in independent director compensation and shows that there are many components that can determine the level of compensation. In this paper, they suggest that it would be interesting to examine the impact of the levels of independent compensation on the behavior of the director and economic outcomes. For example, do better compensated independent directors undertake better monitoring and improve mergers and acquisitions outcomes?

This is an interesting question, because the independent directors now have more duties and responsibilities, which result in better compensated independent directors. Prior literature shows that the presence of independent directors has an impact on the performance of the firm. Fernandes (2005) shows that a board, without the presence of independent members, has less agency problems and a better alignment of the interests of shareholders, which leads to a better performance of the firm. This implies that with the presence of independent directors, it is more likely to have problems (e.g. agency costs, different interest, lack of monitoring). Fuzi et al. (2015) shows that even with the appearance of independent directors on the board, it does not lead directly to better firm performance nor better governance. These results show that the presence of an independent director affects, both positive and negative, the firm’s performance. Dahya and McConnel (2004) show a positive relation between the fraction of outside directors and the board decisions. They state that ‘‘outside directors are more likely to appoint outside CEOs and the investors appear to perceive that board with substantial outside director representation make better decisions.’’ Given the elaborate motivation in the prior section, the following research question will be answered in this study:

Does the independent director compensation affect M&A performance?

I examine this research question through a quantitative research method based on archival data. I retrieve US data, in the period 2008-2015, from Compustat and Thomson One Banker. To answer the research question, I set up four hypotheses. The first hypothesis looks at the relation between the total independent director compensation and the four-week acquisition premium. The second hypothesis examines if a higher cash-based compensation lead to a lower price paid for the acquisition. The third hypothesis examines a higher equity-based compensation, split into stock and options, lead to a lower price paid for the acquisition.

I run an Ordinary Least Squares regression to seek evidence for an association between the independent compensation and merger and acquisition performance. The outcomes of these regressions do not show any significant results. This indicates that there is, with the limitations in this thesis, no evidence for a relation between the independent director compensation and the four-week acquisition premium. Therefore, the compensation of the independent directors does not affect the M&A performance. The results of the analysis section show that there is not one significant relation with the separated independent director

compensation variables. The compensation for independent directors does not influence their role in merger and acquisition decisions and the premium paid for the acquired firm. The results confirm the objective role of the independent directors in mergers and acquisitions, which is in line with my expectations.

This research will contribute to the existing literature. There is no article or paper that specifically looks at the influence of independent director compensation, for example on M&As performance. Most of the papers examine the influence of director compensation or board of director compensation on firm performance (M&As, R&Ds etc.). Some of these papers include the percentage of independency on the board, but are not primary focused on independent director compensation. I expect different results than the papers on director compensation and M&A performance, because of the objective role of independent directors in the decision-making process of companies. Furthermore, Adams and Ferreira (2008) and Yermack (2004) both state that it is not always the money that incentivize the independent directors to perform their role effectively. Another reason for my expectation is that independent directors have a more monitoring and advisory role than directors and therefore they are not always able to influence the decisions of directors.

This study will give us more information of the influence of the independent director compensation on the M&A performance of the firm. The outcome of this research gives us evidence to prove the objective role of the independent director and therefore it can help management and board in their decisions regarding the composition of the board and the level of the compensation. This study can also be used as a starting point for future research, to make a complete study of the effects of compensations given to independent directors.

This paper is structured as follows. The second section discusses the literature regarding the board of directors, director compensation (specifically focused on independent director compensation), mergers and acquisitions and the role of the independent director in M&As. Section three provides the methodology and data and sample selection. The fourth section reviews the results of the analysis of the relation between independent director compensation and the four-week acquisition premium. Finally, section five provides the discussion and limitations and section six discusses the further research.

2. Literature

In this literature review, I elaborate on two concepts relating to my research question. First, I review literature on the role of Board of Directors and the independent variable of interest: director compensation, with the focus on independent director compensation. I link these relevant theories which explains the economic effects that arise from compensation. Second, I summarize literature relating to the independent variable of interest: Mergers and Acquisitions (M&A), economic influences and effects of M&A. Lastly, I elaborate on the association between independent director compensation and M&A.

2.1 Agency theory

The agency theory is a common notion in corporate governance, especially regarding the role of board of directors. The papers of Jensen & Meckling (1976) and Fama & Jensen (1983) cover the agency theory about the separation of ownership and control. Agency costs arise from the different interest between managers and shareholders, which lead decisions of managers that are best for themselves. This makes it harder for the principal to monitor the agents, which results into information asymmetry and rising agency costs. These are costs that the principal make to monitor the agent (Fama & Jensen, 1983). The agents have information that the principal does not know and they can make decisions that is best for them, but not for the firm. To avoid this information problem, a board of director is set in place. Their role is to act upon the interests and benefits of the shareholder and monitor the actions of the directors (Jensen & Meckling, 1976; Fama & Jensen, 1983). The danger of information asymmetry between shareholder and the directors can lead to, for example ‘empire building’, where they want to increase the size of the firm, but not the value to the shareholders or it can result in directors who are getting risk-averse when it comes to secure their own safety in the firm (John and Senbet, 1998).

In this scenario, the board of directors are the principal; and the management is the agent. This creates another agency relation between the shareholders (principal) and the board of directors (agent). This can rise additional agency costs between the shareholders and the board of directors (John and Senbet, 1998). Therefore, it is the task to provide balanced (non) financial incentives to align the interests of board of directors with the interests of shareholders.

For the shareholders, it is important to align their interests with the board of directors and management. Agency theory can lead to risk-averse working and different goals for the directors. The directors can make decisions that increases their own personal wealth but decreases the value of the firm. That is why independent directors are placed in the board to monitor management and the director and advise them in decision-making (Jensen & Meckling, 1976; Fama & Jensen, 1983). In return the independent directors receive an annual compensation in the form of cash or equity (stocks/options). This raises the question whether the height of this payment will influence the monitoring and advising role of the independent director and will improve the decisions from the directors (and so improve firm performance).

2.2 Optimal Contracting theory

This theory states that a director needs to be sufficient incentivized in order to perform its task in the interests of the shareholders. In combination with the agency theory, the independent directors ensure that the interests of the directors are aligned with the shareholders’ interests. The optimal contracting theory helps to reduce the agency costs (Weisbach, 2007). The theorists of optimal contracting make a few points why directors should be paid better. The first point is about the talent of the director, because very few people can operate in the same position. Secondly, the directors make very important decisions that have a major influence on the firm. The last point is about the numbers of independent directors that have increased in large public firms. They are less likely to be co-opted by management than inside directors (Weisbach, 2007).

Bryan and Klein (2004) examine if the independent director options are consistent with the optimal contracting theory. Their results show that the use of equity-based compensation lead to an increase in firm performance. It shows that the stock-based rewarded independent directors are more incentivized to monitor and advice.

2.3 Role Board of Directors

Due to worldwide scandals (e.g. Enron and WorldCom) and a financial crisis in 2008, the public is questioning the role of top management and corporate governance in companies. There is need for changes in corporate governance, and especially on the role of board of directors. The main objective of the board of directors is to play an active role in overall

management and control the corporation (Maassen, 1999). According to Fama and Jensen (1983) the board of directors is responsible to take decisions that are in line with the interests of the shareholders.

The composition of the board is: (CEO/executive) director, chairman and independent directors. Each has his own responsibilities on the board. The director is involved in the day-to-day operations of the company and is the face of the company. The independent directors are monitoring and advising management to ensure that they operate on behalf of the interests of the shareholders. With the attendance of independent directors, the firm tries to reduce the agency costs (Fama and Jensen, 1983). The duty of the chairman of the board is to organize and maintain the board (meetings) and to communicate the latest updates of the business operations to their shareholders (Higgs, 2003). In order to have an effective board, the shareholders need to implement a solid corporate governance structure. Bertin & Schmidt (1996) argue that in a solid corporate governance structure, the independent directors should have sufficient incentives to perform his tasks in the most effective way. It is proven by institutions that a better structured corporate governance will lead to higher valuations, more effective reporting and management improving their performance (Claessens, 2006; Maher & Andersson, 2000).

Furthermore, there are different sort of board structures. According to Maassen (1999), the common structures are the one-tier board model and the two-tier board model. The one-tier board is used in Anglo-Saxon countries such as US, the UK and Canada. In the one-tier model, the directors and independent directors are operating together in one organizational layer. The two-tier board structure model is used in European countries (e.g. Germany, Netherlands and Finland). In this model, the director and independent director are placed in different organizational layers. The director is responsible for the day to day business and the independent director is monitoring and advising management and the directors (Maassen, 1999). The focus in this thesis is on the one-tier board (US sample), specifically on the compensation of the independent directors.

Since George Bush signed the Sarbanes-Oxley Act (2002), the corporate governance structure of companies is improved (Cohan et al., 2010). The companies have to apply a full independent audit committee who is not involved with the internal operations of the firm. The new law mainly focuses on the independence of the board. The SOX Act introduces measures for the members on the board to remain independent (Sarbanes-Oxley Act, 2002). The auditor

needs to report directly to the audit committee instead of management. The audit committee is also set up to handle complaints and tips that they receive from internal and external sources, which will be discussed in independent counsels. The audit committee also states, that there has to be an independent compensation board who determines the compensations of the board of directors (Calkoen, 2011).

Compared to other countries, the bonus culture in the US is the strongest. In the US, the companies need to be more transparent in disclosing (non-financial information about their board of directors. Whereas, in the UK, they are less transparent in disclosing information (e.g. not disclosing the compensation of directors) about the board of directors. (Calkoen, 2011). The duties of the directors of both structures are almost identical, their duties build on the pillars of loyalty and care. There is no difference between the roles of the global board members. The members have to focus and monitor the purpose, strategy, policies, risk management, succession, evaluation and communication in order to prevent risks as ‘’empire building’’ by the CEO (Maassen, 2012).

In order to execute their roles, the company has to composite the board in the most effective way. Maassen (2012) states that the average size of a board of directors in the US is around eight to ten members. Most of the times the CEO is the only director and the rest consists of independent directors. One of them has the position of chairman (separated from the CEO). The rest of the committees solely consist of independent directors (Maassen, 2012). In the US, it is typical to have a strong attendance of independent director on the board to find a proper balance between the powerful CEO and the rest of the board. In comparison with the UK, they only have a small majority of independent directors to have proper balance (Calkoen, 2011).

The difference between the one-tier in the US and two-tier board in Europe, is that independent directors can be directly involved in the decision-making process and they are participating in strategy development. Whereas, in the Netherlands for example, the independent directors are not that involved in these operations (Calkoen, 2011). Therefore, my focus will be on the firms from the US

2.3.1 Incentives for independent director

When the independent director is appointed, there must be enough incentives to invest time and effort in his monitoring and advising role (Roberts, McNulty & Stiles, 2005). Some studies point out that this is not always the case, because the independent directors are busy people who do not always take their time to perform their duties (Carter & Lorsch, 2004; Mace, 1971). This will have a significant effect on the shareholders’ value, mostly a negative effect. This is the reason why the independent directors should be better incentivized, in order to perform their job correctly.

Since the average age of an independent director lies between 50 and 65 (HayGroup, 2014), it is not always the money that incentivize the independent directors to perform their role effectively (Adams and Ferreira, 2008; Yermack, 2004). The literature does not provide much information about the incentives for independent directors. According to several studies, there can be three main incentives for the independent directors: legal liability, reputational and career concerns, and monetary incentives.

Legal liability

The first incentive is legal liability. Shavell (1982) analyses how incentives can be affected, through liability rules and insurance, that results in reduced accident risks and the allocation of such risks. In some situation directors, in general, can act very negligent which can have negative financial consequences for the company. He concludes that liability rules and negligence can create incentives for the directors to allocate certain risks.

Gutierrez (2000) researches how legal liability rules can be set in a way that the directors are incentivized to fulfil their fiduciary duties and to maximize share value. His results show that liability rules are designed to align the interests of the shareholders and the directors.

The set of liability rules also has a downside. When there are lots of liability rules, the independent director might act very risk averse, which results in monitoring too much and leads to conservative decisions (Gutiérrez & Sáez, 2012). It could also ‘’scare’’ talented professionals not to work for a company with too many liability rules (Gutiérrez & Sáez, 2012).

Reputation and career concerns

Another incentive for independent directors is their reputational progress and career steps. The directors on the board want to create and maintain a good reputation over the years. Their reputational background can be used as a statement that they care about the welfare of the shareholders. Directors with an experienced reputational background are more likely to be chosen as a candidate for boards on other firms (Fama & Jensen, 1983; Zajac & Westphal, 1996). When the directors are not performing like they should do, it will harm their reputation and this would lead to fewer opportunities of board seats in the future. Also, the literature points out that a director who is trying to build a good reputation, is mainly a ‘busy’ director who is trying to serve on as many boards as possible. According to Fich and Shivdasani (2006) and Renneboog and Zhao (2011), busy directors are less able to perform their monitoring role.

Raheja (2005) argues that the directors on the board gain reputational benefits when the firm is improving its performance. This indicates that directors have incentives to provide more inside information to the board that will improve the decision-making processes and thereby increasing performance of the firm.

Furthermore, the career concerns of the independent director may influence its efficiency. Song and Thakor (2006) provide a theoretical framework where the career concerns of the independent director influence the investment decisions. The independent director will favor overinvestment in an economic growth or favor underinvestment in the opposite situation.

Monetary incentives

Monetary incentives are most of the times tied to performance of the firm. Fama and Jensen (1983) suggest that independent directors should not be compensated for the performance of the firm, because that will interfere with reputational concerns. The independent director should not have any interests in the performance of the firm. However, the independent directors do get fees for every board meeting they attend and are sometimes also rewarded with stock or stock options. Especially in the US, the independent directors receive compensation in the form of stocks (Yermack, 2004). Yermack (2004) examines the total compensation of independent directors of the Fortune 500 firms and discovers that the compensation in the first five years differ from $186,000 till $428,000. This can incentivize the independent directors to perform their tasks in the best way. Due to the difficulty to

measure the other two other incentives and the big difference between the monetary compensations, I will focus on the monetary incentives of independent director. I will separate the compensation into five variables, total compensation, cash, stock, options and equity-based compensation. The last four are taken as a percentage of the total compensation, which makes it easier to compare during the analysis part.

2.4 Director compensation

The compensation that is rewarded to the board of directors varies through different positions. Directors get much higher compensation then independent directors, because directors are involved in the day-to-day operations of the business and have the responsibility over important decisions. For both directors, their compensation is based on fixed and variable components. The total director compensation exists of a fixed annual payment and they will also receive a variable payment (e.g. board fee, stock options, stocks). There is a difference whether a firm provides variable compensation to the directors: smaller firms are more inclined to provide a fixed compensation, while medium/large firms will rather give a variable compensation (Fernandes, 2005). Furthermore, the medium/large companies give a higher compensation due to the difficulty in monitoring a more complex structured company. Most studies focus on the director compensation and its effects on firm performance or board behavior, but there has been little research done to the effects of independent director compensation. The focus in the next part will therefore be on independent director compensation.

The compensation for an independent director differs per country. In the US, they provide more stock-based compensation and in the European countries they provide more fixed cash-based compensations. The compensations also differ due to the different board structures (Maassen, 1999). The compensation for the independent director is to provide incentives to perform their monitoring and advising role is such way that the interests of the director is aligned with the interests of the shareholders (Magnan et al., 2009). It matters what sort of compensation is set for the independent director. According to Fich and Shivdasani (2005), independent directors are more likely to better monitor and advise when they are compensated in stocks. It changes the way of thinking and acting when you are stock-based rewarded so that people act on the long-term instead of short-term (Dechow & Sloan, 1991). Whereas, cash-based incentives lead more to short-term thinking and may not align the interests of directors with the interests of the shareholders. Yermack (2004) examines the compensation incentives for independent directors of the Fortune 500 firms. He finds that the compensation of the firm is not related to the performance of the firm, but related to the complexity and size of the firm.

Hay Group (2014) analyses the independent director’s compensation in the US and they find a significant link between the director’s pay and the size of the firm, because bigger firms provide higher compensations. Since the role of independent directors has changed, the

fees have increased each year. According to this group the annual payment increased over the last couple of years with 6 per cent. In the US, the NYSE and NASDAQ require the public board to have a majority of independent directors. Most of the public firms would have 75 per cent or more on the board. The annual cash compensation of the 300 firms Hay Group analyses is $85,000, equity compensation $130,000, and an average total of $248,000 per year (Hay Group, 2014).

2.4.1 Cash pay-out

The compensation for independent director depends on the applied board structure. European countries have more fixed annual cash compensation and in the US, there is more stock-based compensation. The cash compensation can be separated into two major forms; salary and bonuses\fees. The directors will receive a fee for attending to board meetings (Hay Group, 2003). The height of these payments depends on several factors. There are economic factors (e.g. firm size and complexity, growth and investment opportunities, liquidity), director characteristics (e.g. reputation, experience) and board structure (e.g. number of independent directors, CEO remuneration, size of the board) (Bugeja et al., 2016; Core et al., 1999; Smits, 2009).

Most of the research that looks at the relation between board of director compensation and firm performance focuses mainly on director compensation and not independent director compensation. Most of these papers find a positive relation between the compensation and firm performance. Hu (2011) and Verbaas (2015) find a positive relation between director compensation (cash and stock-based) and M&A performance. Ghosh (2003) finds a positive relation between the board compensation and the performance of the firm. There is however a threshold to this result, the size of the board and the % independent directors in the board has some influence on this result. Ghosh (2003) finds that the performance of the firm is decreasing when board size exceeds 11 persons or the proportions of independent directors exceeds 73% due to free riding problem.

The results of Chaubey and Kulkarni (1988) and Zajac (1990) and Wallsten (1999) show that there is a significant positive relation between the compensation of a director and the R&D expenses in the firm. All these results suggest that the height of director compensation is affecting the performance of the firm. The biggest incentive for the director to perform his tasks well is due to the threat that, when a company’s performance is decreasing, the director’s personal wealth is hurt (Yermack, 2004). A threat like ‘empire building’ or risk-averse behavior for the organization can occur when the compensation of the

directors is not well structured. When the compensation of the directors is divergent, it gives them more incentives to take suboptimal decisions which can reduce the firm performance and value (Hope & Thomas, 2008). This will occur when the shareholders don’t have high quality monitoring directors that will prevent these suboptimal decisions.

A way to stimulate the independent directors to monitor is by rewarding them for every attendance at a board meeting. In this way, the independent directors are more incentivized to get involved in the company. Adams and Ferreira (2008) examines if independent directors are going to the board meetings when they are rewarded with a board fee. Their results show that the independent directors are less absent in the meetings, which means that they are more involved with the company.

2.4.2 Stock

The stock-based compensation can be separated into stocks and stock options. A couple decades ago the independent directors were given more cash-based rewards instead of equity-based. During the last few years this has changed more and more. When a director is compensated in cash, there is a significant higher change that he will be short-term thinking which could affect the firm over the long period. That is why the firms give stock options in order to let them focus on the long-term period which also does not hurt their compensations (Dechow & Sloan, 1991).

The stock-based compensation can be divided over two separate components; stock and stock options. Jensen (1989) states that there are more incentives for the director when the stockholdings of independent director is increasing. He also notes that: “ … the idea that outside directors with little or no equity stake in the company could effectively monitor and discipline the managers who select them has proven hollow at best” (Jensen, 1989, p.64). Prior research shows that there is a positive relation between director stockholdings and the performance of the firm. Hoskisson et al. (1994) finds that independent director ownership increases the performance of the firm and Grossman & Hoskisson (1998) find that directors’ interests are more aligned with the interests of the shareholders when they have a large block of equity in the firm, because the directors want to target a high share price. The results of Cordeiro (2005) shows that the stocks granted and stock options given leads to an increase in future firm performance. Moreover, Bryan and Klein (2004) and Bebchuk et al. (2007) also examine this relation and both resulted that the firm performance is increasing when the level of stock compensation is higher. Farrell et al. (2008) states that fixed-value rewards are more generally used then fixed-number rewards, because this creates a better incentive for the

directors and let them strive for greater transparency. When the directors are rewarded with a fixed amount of stocks, it will give them incentives to make decisions that increase the share price but can harmful for the organization on the long term.

Benmelech, Kandel and Veronesi (2010) examine the stock-based compensation and the CEO (dis)incentives. Their results show that stock-based compensation ensures managers to exert more effort into growth opportunities of the company. They argue that it matters whether it is a high-growth firm, because these firms have a higher weight on their stocks. In their paper, they are referring to the 1990s-high-tech boom and the financial crisis in 2007-2008, where firms have high-growth rates and high uncertainty which are coupled to director stock-based compensation. This result into directors who present their company as high-growth firms, even though their options are much lower. This led to the behavior that a director pretended that they are a ’high-growth’ firm, which led to a crash of the stock price.

2.4.3 Stock options

The directors can also receive stock options as a reward. The difference between stock and stock options is that an option is a contract where the owner has the right to buy or sell these stocks on a certain date. As well as the stocks, the stock options are also to align the interests of the directors, management and the shareholders. Some studies have examined the relation between equity ownership and the performance of the firm. Magnan et al. (2009) shows that the firm is performing better when stock options are used. Morck, Shleifer, and Vishny (1988) find a positive relation between stock ownership of outside directors and the performance of the firm. The stock options can also influence the behavior of the director on the board. It influences its behavior in a positive way that a director, who is high rewarded in stock options, will encourage to carefully select and value targets. Therefore, it is more likely that the director will choose its acquisition better, which potentially increases the shareholders’ value (Datta et al., 2001) The downside according to Wright et al. (2002) is that the rewarding in high stock options will not be as effective when the director has a diversified personal portfolio through the company. This could harm the shareholders’ value.

Some studies do not agree that stock (options) is the right incentives to mitigate the agency costs. The risk of providing too much equity can change the way of acting. The study of Dong et al. (2010) shows that the director whose wealth is reliable on stock return volatility, would favor debt over equity when it comes to capital-raising. They are suggesting that companies should restraint the amount of stock options given to the directors in order for them not to be too risky. Several more studies show the positive relation between stock

options compensation and the risk taking of directors (Haugen and Senbet, 1981; Smith and Stulz, 1985). They argue that managers who are risk-averse and undiversified and whose wealth is coupled with the value of the firm have more incentive to reject positive net present values that are sufficiently risky. However, some studies argue that the rewards in stock options would discourage the director to take risks (Carpenter, 2000; Lambert, Larcker, and Verrecchia, 1991; Lewellen, 2006; Ross, 2004). They suggest that the effects of stock options depend on the number of firm’s risks and the risk-appetite of the director and these stock options will work as an incentive to reduce risk taking.

2.5 Determinants of independent director compensation

In order to execute their monitoring and advising tasks, in the interests of the shareholders, the independent director has to be compensated for his work. According to several papers (Boyd, 1996; Bugeja, 2016; Hempel and Fay, 1994; Hahn and Lasfer, 2011; Linn and Park, 2005) there are economic characteristics of the firm and director characteristics that could influence the level of compensation. These papers research the determinants of independent director compensation.

The economic determinants are: firm size and complexity (Boyd, 1996; Bugeja et al., 2016; Hempel & Fay, 1994; Hanh, 2006; Smits, 2009), growth and investment opportunities (Core et al., 1999; Bryan et al., 2000; Cordeiro et al., 2000; Linn and Park, 2005; Masuls & Mobbs, 2011; Matolcsy and Wright, 2011), firm risk/volatility (Bugeja et al., 2016; Core et al., 1999), and liquidity (Bugeja et al., 2016; Bryan, 2000).

The director characteristics are: Independent director reputational capital and experience (Bugeja et al., 2016; Fama and Jensen, 1983; Matolcsy et al. 2004), and board meetings (Bugeja et al., 2016; Hempel & Fay, 1994; Smits, 2009).

Firm size and complexity.

When a company is becoming bigger it becomes more complex to control. The monitoring and advising duties for the independent directors also becomes more difficult, because they need to commit more time and engagement with the firm. This means that there is need for high quality independent directors (Brick et al., 2006). The relation between firm size and independent director compensation has been researched by several papers and all their results show a positive relation (Boyd, 1996; Bugeja et al., 2016; Hempel & Fay, 1994; Hanh, 2006; Smits, 2009). When the company is growing, the compensation of the independent director increases. In these papers the authors use different proxies for firm size

and complexity, Bugeja et al. (2016) looks at logarithm of market capitalization and the logarithm number of subsidiaries, Core et al. (1999) uses the firm sales and Smits (2009) looks at logarithm of total assets and logarithm of total sales.

Growth and investment opportunities.

Prior research shows that growth and investment opportunities are influencing the compensation of the directors (Core et al., 1999; Bryan et al., 2000; Cordeiro et al., 2000; Linn and Park, 2005). Every paper is providing the same reason why this influences the compensation, because there is a higher chance of information asymmetry in high growing firms since it requires more time to get specific information of competitive opportunities (Smith and Watts, 1992). That means that the independent directors are dealing with more complex situations which requires more specific knowledge and experience and they would demand a higher compensation. Linn and Park (2005) state that the height of the compensation is required to filter out the additional risks associated with high growth firms. Also, Matolcsy (2004) finds that the independent directors, in high growth firms, add more value to the firm. All these statements lead to the same result: higher growing firms lead to higher independent director compensation. Core et al. (1999) and Bugeja et al. (2016) both use the proxy market-to-book (MTB) for growth and investment opportunities.

Firm risk/volatility

Prior research from Core et al. (1999) and Bugeja et al. (2016) shows that the firm risk/volatility has little influence on the compensation of a director. Jensen (1983) states that high stock return volatility firms have more private information that is unknown to outsiders. This also means that there is a higher chance of information asymmetry between the shareholders and independent directors about specific firm information and the business environment, which increase the complexity of the monitoring and advising role of the independent director. Cyert et al. (1997) also finds that firms with higher stock return volatility will provide higher CEO compensations. Bugeja et al. (2016) and Core et al. (1999) both look at the standard deviation of monthly stock returns as a proxy for firm risk and volatility.

Liquidity

The results of the researches of Bugeja et al. (2016) and Bryan et al. (2000) show that there is a positively relation between the liquidity of the firm and the compensation of an independent director. An independent director is more likely to get rewarded with stock-based compensation, instead of cash compensation, when the firm has low liquidity. Therefore, liquidity is an economic determinant for (independent) director compensation.

Independent director reputational capital and experience.

There are various directors appointed, with different reputational capital and/or experience, in the board of directors. Prior study shows that independent directors with more experience and reputation are able to provide higher quality on their monitoring and advising role (Fama and Jensen, 1983). The research of Masulis and Mobbs (2011) find significant evidence that experienced directors will take more profitable decisions, which results in better firm performance. Bugeja et al. (2016) also finds evidence that there is a positive relation between the experience of the independent director and the level of compensation (Bugeja et al., 2016).

Board meetings.

This is an influencing factor, because the amount of board meetings that an independent director is attending to, shows how much engagement is required from an independent director. When the independent director is attending to lots of board meetings, that means that the firm is requiring him to engage more in his monitoring and advising role which would lead to better firm’s decision-making. Bugeja et al. (2016) and Smits (2009) find a positive relation between the number of board meetings and the compensation of an independent director.

2.6 Merger and Acquisition

2.6.1 Definition M&A

What is a merger and acquisition exactly? The definition can be found in many articles and papers. A merger is when a company buys a part (e.g. assets) of another company or buys the whole company to form a new company. An acquisition is when the company is buying another company which will be fully taken over and no new company is made (Anslinger et al., 1996). The strategic decision for a firm to merge or acquire is becoming more and more important over the last years. The decisions regarding merger and acquisition are very important for the firm since it can have an enormous impact on the shareholders’ value (Haleblian et al., 2009; Hellwig, 2000; Holmstrom and Kaplan, 2001; Pagano and Volpin, 2005). M&A reports of Deloitte show that in the last years the amount of M&A’s has been increased and the amount of money invested has increased (Deloitte M&A report, 2015/2016). In the years 2015 and 2016 over 4 trillion dollars was spend in mergers and acquisitions). According to the research of Vafeas and Theodorou (1998) the independent directors play a critical role in M&A decisions. A majority of the independent directors will participate in the decisions.

There are several ways to measure the performance outcome of an M&A. The two most common methods are cumulative abnormal returns (CAR), consistent with the model of MacKinlay (1997), and the relative premium paid for the M&A, consistent with the model of Datta et al. (2001). The CAR is the difference between the expected return (expected by shareholders) and the actual returns of the M&As. The event window can range from one day before and one day after the announcement (three days) till 30 days before and 30 after the announcement. As long as the day of announcement and after announcement are included. The second method uses the relative price paid per share minus the price per share four-weeks before the announcement.

For this research, I use the relative premium paid as a proxy for M&A performance. This measure shows us how much management is willing to pay for a target. Also, because the CAR requires estimations to measure the expected return, whereas the relative premium paid is not based on expectations. The premium amount can be determined in an objective way, because the price paid per share and the share price of the acquired firm one month before the acquisition was announced, are public known.

2.6.2 Drivers M&A

There are different drivers for merger and acquisition; increase shareholders’ value, capturing synergies, diversification or improving access to sources of financing (Bruner, 2002). Berkovitch and Narayanan (1993) argue that there are three major motives for merger and acquisitions; synergy motive, agency motive and hubris. The synergy motive reflects that a company wants to increase its size and its economic gains, which eventually leads to an increase in shareholders’ value. The agency motive is, as mentioned in the agency theory, that the director can make decisions that will be for their own benefit and not in the interests of the shareholders (Jensen & Meckling, 1976; Fama & Jensen, 1983). In this case, the director pursues a merger that will benefit him but could harm the firm. The third motive is about hubris, which means: excessive pride or self-confidence. When directors are hubris, they are more likely to make mistakes in evaluating the firm and even acquire a firm that won’t have any synergy (Roll, 1986). In the research of Roll (1986) he shows that the average results of the takeovers will be positive, but there will still be valuation errors which still can lead to a negative gain. Moeller et al. (2004) also researches the hubris hypothesis and their results show that larger firms have more hubris managers/directors which will pay a higher premium than normal for a takeover. The results of the study from Berkovitch and Narayanan (1993) shows that there is a positive relation between the target and the total gains. This is the result of synergy motivated decisions.

As expected, the agency motives have a negative impact on the total gains. The hubris motive has both positive and negative gains, Berkovitch and Narayanan states that it has a zero correlation. These empirical results suggest that only one motive (synergy) will increase the value of the shareholders and the other will harm the value of the shareholder. Other motives for the company can be: inefficient management, diversification, tax consideration and market expansion (Vazirani, 2015).

2.6.3 Impact of M&A

The mergers and acquisitions have an impact on the whole company (Kalaiselvi & Parimala, 2015). It has an impact on the workers/employees, on the top management and the shareholders. The merger or acquisition would affect the employees, because the overtaking company wants an efficient set of employees (Kalaiselvi & Parimala, 2015). That means that some of the employees will get fired when the merger takes place. This will have a disciplinary effect on the employees to work harder, which can lead to better performance. It

would also effect the top management in a way that there can be different cultures from the two merging companies. Furthermore, it can threaten their position if the managers make a selfish decision, where the merger will harm the firm but not the wealth of the manager (Kalaiselvi & Parimala, 2015). Last it affects the shareholders of the firm. The shareholders benefit the most since the merger lead to a bigger and more efficient company, which results into better financial position (Kalaiselvi & Parimala, 2015).

The mergers and acquisition will also affect the performance of the firm. Several studies have examined the impact of M&A on the performance of the firm. Healy, Palepu and Ruback (1992) examines if a merger leads to improvement of the firm. They find that the merged firms used the assets more efficient which results in increased cash flows and abnormal stock returns. Whereas Ravenscraft (1989) finds the opposite, that the merger would have a negative impact on the performance and the abnormal stock returns. Morkc, Schleifer and Vishny (1990) also finds a negative abnormal stock return when firms try to diversify themselves, either through buying a fast-growing company or through unexperienced managers. Campo and Hernando (2004) discover the same negative relation. According to Jensen and Ruback (1989) the mergers lead to a positive gain for the company, but it depends whether the deal is being done out of synergy motive or hubris motive. These are just some studies that find mixed evidence about the effects of M&A on the company. The post-performance, after the M&A, depends on the drivers for these decisions.

2.6.4 What affects M&A outcomes

The literature about acquisition discusses some variables that are commonly associated with acquisition outcome. Several studies have examined the following variables that can influence the acquisition outcome; the payment, the size of the organization, strategy and experience, and future compensation policy.

The price paid for the acquisition.

This is a very critical success factor because most of the times the director pays too much for the acquiring company (Bower 2001; Hayward 2002). This leads to destroying value of the company, because it is harder to achieve profitable return. The payment can be done by cash or stocks.

The size of the organization.

The size of the company also plays a critical role in determining which company to acquire. According to Aybar and Ficici (2009) the bigger the size of the acquiring company, the higher the abnormal return for acquiring companies in merger and acquisitions. Moeller et al. (2004) and Kitching (1967) both find that smaller firms who are buying a larger firm can result in sub-optimal outcomes and that large firms who are buying very small firms result in negative abnormal return. Acquiring a firm that is much bigger than yours can lead to struggles for dominance which results in to conflict of interests. Acquiring a very small firm can lead to lack of attention, that it will be ignored so it won’t be efficient to acquire this firm. Firms with the same size that will merger will receive higher announcement returns (Finkelstein and Haleblian, 2002).

Strategy and experience.

The strategy and experience in M&A is quite important in order to get a positive acquisition outcome. Previous studies have shown that companies who have a well set up strategy and experience of M&A are more successful than the companies without strategy or experience (Barkema and Schijven, 2008). Kitching (1967) states that companies who haven’t got a well-structured strategy, miss the opportunity to learn from the acquisitions that will help gain more experience. Delong and Deyoung (2007) recommend that firms who don’t have a well-structured strategy should look at peer companies’ acquisition experiences which will help them to improve their own M&A’s without any experience. Whereas King et al. (2014) examines 93 companies and the experience of the manager and finds that the experience has no effect on the company value creation.

Future compensation policy.

Inkpen, Sundaram and Rockwood (2000) find that the structure of compensation can lead to conflict of interests between the manager and the shareholders. The study of Anslinger, Copeland and Thomas (1996) suggests that companies should award managers upfront with shares to motivate them to align their interests with the shareholders when making the merger and acquisition decisions. This topic has been mentioned before in this thesis. When managers are stock-based rewarded, it might change their managerial behavior and use the M&A compensation policy to increase their own personal wealth but not the value of the company (Devers et al., 2007).

2.6.5 Role of independent directors on M&A

The focus in this thesis is on the board of directors, and specifically the independent directors. The task of the independent director is to monitor the performance of the firm, business activities (e.g. M&A and R&D), and monitor management and directors. Another task is to advice the management in taken important decisions that will affect the shareholders’ value. Both theory and empirical research suggest that management/directors have incentives to take decisions that is best for themselves and not the shareholders (Angwin, 2007). The management/director takes the decision to do a merger, which can be done out of self-interest. The independent director has to monitor this decision objectively and advise whether to proceed or not. An independent director can have incentives to approve the merger, that increases his own personal wealth (bonus compensation), but harm shareholders’ value (Roll, 1986). Therefore, it is interesting to look at the role of independent directors in high valuable decisions like mergers and acquisitions.

Cotter, Shivdasani, and Zenner (1997) researches the relation between independent director and takeover premiums. Byrd and Hickman (1992) examine the relation between independent directors and merger activities between 1981-1987. They examine the tender offer bids made, abnormal stock and the % of independent directors on the board. The outcome of both researches show that the independent director has a certain role and influence in these events.

Mohamad et al. (2017) and Falaye et al. (2011) look at the board monitoring role of independent directors. They conclude that the value of the firm decreases when independent directors are serving on multiple committees in one firm because they are more focussed on their committees instead of advising management.

The optimal contract theory states that managers have to be sufficient incentivized, otherwise there will still be an agency problem that can harm the firm. This theory implies that the director must be incentivized enough, so he will act upon the interests of the shareholders. As mentioned earlier, there are many articles about the effects of director compensation and the performance of the firm. All of these focuses on director compensation and most of them found positive relations with R&D expenses, M&A performance, and accounting based performance of the firm. Hu (2011) and Verbaas (2015) both find a significant relation between the compensation of board of directors and merger and acquisition. Hu (2011) examines the effect of director compensation and M&A performance with impact of the Sarbanes-Oxley Act. He divides the compensations in equity-based

compensation, stock options and cash-based compensation. The results show a significant relation between total (cash and stock) director compensation and M&A performance (measured as Cumulative Abnormal Return). The CAR is the difference between the expected return and actual return of an M&A. The results were more significant when there was a high rate of independency on the board.

Furthermore, Hu (2011) finds that stock-based compensation has a significant moderating effect on M&A performance. When the stock-based compensation is increasing, the firm performance is decreasing.

Verbaas (2015) researches if the board of director compensation have any influence in the relative premium paid for a target company. He uses M&A performance as a proxy to measure the effectiveness of the board. Verbaas (2015, p. 37) rejects the hypothesis: “higher total board of director compensation leads to lower acquisition premium paid for the targeted company”. He does not reject the hypothesis that a higher percentage of board of director compensation leads to higher acquisition premiums paid. The third hypothesis is not rejected as well, higher percentage of equity-based compensation leads to lower acquisition premiums paid. The last hypothesis gets rejected that the higher percentage of shared held by the board of director leads to lower acquisition premiums paid.

I use the same measurement for the dependent and independent variable as Verbaas (2015) uses in his paper. However, the focus is different since Verbaas looks at the total board of director compensation and this paper will only focus on independent director compensation. The dependent variable that Verbaas uses, four-week acquisition premium, is a common method by Datta et al. (2001), to measure the M&A performance. The focus on this paper is based on board of director compensation, but does not look specifically to independent director compensation. It is therefore interesting to see whether the outcome of the results is different.

The results of independent director compensation can provide us information over the objective role of independent directors. To reflect the objective role, the compensation should not influence the performance of mergers and acquisitions and since the average age of an independent director lies between 50 and 65 (HayGroup, 2014), it is not always the money that incentivize the independent directors to perform their role effectively (Adams and Ferreira, 2008; Yermack, 2004).

Because of this, I expect different results than the results of Verbaas. Based on the results of this thesis, the board and management can argue whether to adjust the compensation of independent directors or not. Therefore, this paper will contribute to the existing literature of independent directors.

2.7 Hypothesis development

The research question in this thesis is: Does independent director compensation affect merger and acquisition performance?

The independent director compensation and its effects on M&A performance is an unexplored field. The results reflect the objective role of the independent director in mergers and acquisitions. If there is no relation between the independent director compensation and M&A performance, then it confirms the objective role of the independent director. This will therefore contribute to a better insight in the effects of the independent director compensation.

The literature states that independent directors are appointed, by the shareholders, in order to reduce the agency costs in the firm. The agency costs arise when the interests of the directors and management are not in line with the interests of the shareholders. When this situation occurs, the directors make decisions that will increase his personal wealth, but can harm the shareholders’ value. The task of the independent director is to monitor and advise the directors to align their managerial behavior, which is desired by the shareholders, with the firm. This should have a positive effect on the decisions that the directors make, e.g. decisions regarding merger and acquisition, R&D investments, and day-to-day decisions. My focus will be on the merger and acquisition performance of the company and specifically, the premium paid for the acquired company. This is the most effective way to measure the M&A performance, since the premium paid for the acquired company tells how much a company is willing to pay for it. Furthermore, the premium amount can be determined in an objective way because the price paid per share and the share price of the acquired firm one month before the acquisition was announced are public known.

The first relation will test whether the total independent director compensation has any influence on the M&A performance of the company. This relation will test whether the height of the compensation will influence the decisions regarding to M&A. The shareholders have to provide enough incentives to the independent director to perform their monitoring

and advising role efficiently to align the directors’ interests with the interests of the shareholders. Researches by Hu (2011), Verbaas (2015) and Zajac (1990) all show a positive relation between the compensation of a director and the performance (i.e. M&A performance and R&D performance) of the firm. To my knowledge, there is no paper yet that examines the cash-based compensation of the independent director and the M&A performance. Bugeja et al. (2016) states that a higher compensation leads to a better job performance of the independent director and it increases the independent directors’ involvement, monitoring and advising role in the firm. This would result into better decisions regarding M&A and lead to a lower price paid for the M&A.

H1: A higher total independent director compensation leads to lower acquisition premium paid for the acquired company.

The second relation is between the % cash-based compensation, as a percentage of the total compensation, of independent directors and M&A performance. The cash-based compensation consists of a fixed annual payment and fees for attending to board meetings. The advantage of cash-based payment is that it is not related to firm performance. Also, the board fees attract the independent director to attend to all the board meetings, which leads to more involvement in the firm by the independent director. When their cash-based payments will increase, it will increase their efficiency in the company and will result in lower paid premium for the acquired companies.

H2: A higher cash ratio (as a percentage of the total compensation) leads to a lower premium paid for the acquired company.

The third relation is between the % stock-based compensation, as a percentage the total compensation, and M&A performance. The stock-based compensation can be separated into stocks and stock options. As well as the stocks, the stock options are also there to align the interests of the directors and the shareholders. Prior research has focused more on the CEO compensation (equity-based) and the performance of the firm (Datta, 2001; Jensen & Murphy, 1990; Magnan et al., 2009; Yermack, 2004). In most of these researches, it turns out that the acquisition performance is higher when the CEO compensation is equity-based. But the chance of agency costs is still there when the interests of CEO and shareholders are not aligned. That is reason why the shareholders need independence on the board. According to

Ryan and Wiggins (2004) there are stronger incentives when there is more independence on the board. On the other hand, Johnson (2003) finds that stock options compensation is a bad idea. It will give the management perverse incentives to invest in projects with too much downside risks and the options would carry unnecessarily high discount rate. This will lead to high volatility of stock and market skepticism about the use of retained earnings. Also, the stock-based compensation will give the employees capital gains, but the compensation will be better when these capital gains are avoided. Stocks and stock options are tied to the performance of the firm. The independent director wants to increase the firm performance in order to get a high reward from the stocks. This will incentivize the independent director to be more involved in the decisions to make the best M&A deals. This can lead to a lower paid premium for the acquired company.

H3a: A higher stock ratio (as a percentage of the total compensation) leads to a lower premium paid for the acquired company.

H3b: A higher options ratio (as a percentage of the total compensation) leads to a lower premium paid for the acquired company.

A relation between the independent director compensation and important business decisions may influence the objective role of the independent director. Since there is not much research about the compensation of independent director it is more difficult to find tension. Most of the papers are focused on director compensation and nearly all these papers find a positive relation between the cash-based compensation and the M&A performance. Independent directors have a different role in the decision-making process of the organization. H1 examines the total director compensation and M&A performance. If the independent director receives a higher compensation, it can result into more involvement of the independent director in the decisions regarding M&A. This can result in a lower paid premium for the acquired company. However, since the independent directors have an objective role in the company, it can also be that it does not affect the M&A performance. The independent directors should not act differently when they are better compensated and therefore we might not see any relation.

It is also interesting to examine the outcome of cash-based compensation, which could confirm the theory and empirical research suggesting that cash-based compensation has a positive influence on M&A performance. If this is not the case, I would reject H2.

The biggest tension arises from the equity-based compensation, since that is related to the firm performance. The theory and papers suggests different results regarding the influence of equity-based compensation. This paper will provide us further insight whether H3a and H3b are rejected or not.