گردش مالی مدیریت و جبران خسارت اجرایی در تصاحب هم افزایی

The purpose of this paper is to provide a model of management turnover and executive compensation for a synergistic takeover. I extend a principal-agent model to include a synergy factor. I argue that the choice of management structure—turnover or no-turnover—provides an opportunity for the shareholder to efficiently utilize three elements of the incentive contracts: effort, insurance (risk-reduction) and synergy. I explain high turnover rates after takeovers, especially in conglomerate mergers as compared to horizontal mergers. Also, my model is consistent with empirical evidence that there is a high rate of management turnover in friendly as well as hostile takeovers and thus complements the model of the disciplinary role of takeovers. I also discuss an optimal compensation structure in synergistic takeovers compatible with their corresponding organizational forms.

High rates of management turnover after a takeover are well documented in literature. Martin and McConnell (1991) show that the turnovers of CEOs, chairpersons and presidents are about 56% and 29% in the first and the second year after a takeover during 1958–1984. Further, Morck, Shleifer and Vishny (1988) and Walsh (1988) provide additional evidence of a high rate of top management turnover after a takeover. A popular claim is that a takeover has the disciplinary power of an external market for corporate control. Thus, a takeover is often considered as a mechanism to replace inefficient top management teams.1 Although the disciplinary role of a takeover is often employed to explain high rates of management turnover, there are some weaknesses in the argument. First, an implicit assumption underlying the disciplinary aspect of a takeover is that the shareholders (or board of directors) are not capable of disciplining their own top managers. That is, it is implied that any internal governance structure (board of directors, proxy contests, compensation, etc.) in place may not work properly in target firms. If this is true, then the target management’s nonvalue-maximizing behavior can be corrected by implementing a more efficient governance structure after a takeover. Therefore, this process does not necessarily lead to management turnover. Shivdasani (1993) and Weisbach (1993) show evidence supporting the disciplinary role of corporate takeovers in examining the governance structure of hostile takeovers, which are believed to be disciplinary. However, they explain management turnovers only in the case of hostile takeovers, not friendly takeovers, which are considered to be synergistic. An interesting finding by Martin and McConnell (1991) is that the management turnover rate is no different in hostile and friendly takeovers. Further, they show that there is no difference between the pretakeover performances of hostile and friendly takeovers. Second, it may not be true that the acquiring firm’s managers are in the best position to determine the quality of target managers, especially when the acquiring firms are not in the same industry as the target firms (i.e., conglomerate mergers). However, Choi (1993a) suggests that the frequency of management turnover after a takeover is much higher in conglomerate mergers than in horizontal mergers.2 Finally, there is a synergistic gain hypothesis that is well accepted for motivation of takeovers (See Bradley, Desai and Kim (1983)). The synergy hypothesis does not imply the replacement of target firm managers after mergers. Therefore, it is interesting to investigate a linkage between management turnover and synergy-driven takeovers.3 The purpose of the paper is to provide a model of management turnover and executive compensation for a synergy-motivated takeover. I extend a principal-agent model with a moral hazard problem (Holmstrom and Milgrom (1991)) to include a synergy factor. It is assumed that a takeover is motivated by potential synergy in resource allocation. Upon a takeover, the shareholders (represented by the board of directors) determine organizational structures and incentive contracts. Which is the more efficient organizational structure between two management groups after a takeover—the parent manager controlling both divisions (management turnover or centralized structure) or the parent and the subsidiary manager controlling their own divisions (no management turnover or decentralized structure)?4 What is the optimal compensation structure under alternative organizational forms? Ramakrishnan and Thakor (1991), Aron (1988) and Itoh (1992) also examine internal organization and overall efficiency. Although they use different terminology, they basically compare the two organizations considered in this paper. The main distinguishing feature in this paper is in considering synergies (production externalities) within organizations. Ramakrishnan and Thakor (1991) are interested in the principal’s choice of cooperation and competition between two agents. A conglomerate merger is motivated by the shareholder’s choice between incentive contracts with cooperating and competing managers. The correlation between the two firms’ risks determines the choice. My model considers the effect of the synergy factor, which interacts with the correlation in determining the incentive structure. I also include horizontal mergers in addition to conglomerate mergers in the analysis. Aron’s model assumes a zero correlation, ignoring performance comparison issues. Again, potential synergy in a takeover and its interaction with the correlation are not considered. Itoh (1992) considers a production interaction which is, however, different from the one I consider. In Itoh’s model, a task is shared by two managers whose efforts are unobservable. Thus, cooperation in teamwork may be important for efficiency. In my model, there is no task-sharing, and the manager exerts his effort into his division only, but creating a spill-over effect on the other division, which I call production externality or synergy. In my model, synergy is expressed in terms of a production externality: Manager 1’s effort affects the outcome of manager 2 through an externality even if manager 1 does not influence manager 2’s output directly. For example, although EDS managers do not work directly on the automobile production in General Motor (GM), their effort in improving electronic technology will indirectly benefit GM due to spillover effects or externalities in corporate combination. Further, the externality (synergy) exists regardless of management turnover. I use the terms, synergy and production externality, interchangeably.5 This paper considers synergistic takeovers, regardless of internal organization. In other words, the benefit of externalities (synergistic gains) exists both in centralized (turnover) and in decentralized (no turnover) structures. I use the term, externality, because it captures the concept of synergy in my model quite well. The main finding is that the contractual efficiency between owners (shareholders) and managers of an organization depends on the choice of organizational form—centralized (turnover) or decentralized (no turnover). Under each organization, the efficient managerial contract is determined by an interaction between synergy and risk (noise). Therefore, the optimal choice of internal organization after a synergistic takeover is affected by an optimal trade-off between the degree of synergy and the overall risk (e.g., noise in the cash flows of the two divisions). It is shown that when there is significant synergy but low (or negative) correlation between two divisions, an incentive structure in general motivates a manager to handle both divisions rather than having two managers run their own divisions. Depending on the managerial structure (turnover or not), the significant synergy enhances or mitigates the effectiveness of incentive contracts. That is, synergy can be fully realized under a one-manager (centralized) structure, while it may bring forth an incentive distortion in a two-manager (decentralized) organization. The incentive distortion may be great when the noise correlation between divisions is significant and positive (an example is when the two divisions are in the same industry, e.g., horizontal mergers). Therefore, we expect, consistent with Choi (1993a), a higher turnover rate (centralized) in conglomerate mergers (e.g., low correlation) than in horizontal mergers (e.g., high correlation). This paper is organized as follows: Section 2 describes the model with a linear-sharing rule under a production externality (synergy). Section 3 defines the organizational form and analyzes its impact on managerial compensation. An optimal managerial structure (turnover or not) is determined in Section 4. A graphical summary and empirical implications of our results are provided in Section 5. Section 6 concludes the paper.

This paper examines how an optimal choice of management structure—turnover or no turnover—after a synergistic takeover is made in a principal-agent framework. In particular, I show that potential synergistic gains anticipated in a takeover play an important role in determining turnover decisions. An optimal incentive contract and the turnover decision are simultaneously determined by the degree of synergy in addition to risk-aversion, uncertainty in division cash flows, and correlation in the cash flows between the two divisions after a takeover. I show that the choice of management structure after a takeover provides an opportunity for the shareholder to efficiently utilize three elements of the incentive contracts: effort incentive, insurance and synergy. My model suggests that a simultaneous consideration of incentive contracts and managerial structure after a takeover is essential to provide a well-balanced incentive structure. I explain high rates of management turnover in acquisitions, especially in conglomerate mergers as compared to horizontal mergers. Also, my model is consistent with the empirical evidence that there are high rates of management turnover in friendly as well as in hostile takeovers, and thus complements the model of the disciplinary role of takeovers. Finally, I provide some empirical implications for an optimal compensation design under an alternative managerial structure, which warrants an interesting future investigation.