PhD Oral Exam - Nada El-Hassan, Finance

When studying for a doctoral degree (PhD), candidates submit a thesis that provides a critical review of the current state of knowledge of the thesis subject as well as the student’s own contributions to the subject. The distinguishing criterion of doctoral graduate research is a significant and original contribution to knowledge.

Once accepted, the candidate presents the thesis orally. This oral exam is open to the public.

Abstract

Many papers in the finance literature (and other fields) focus on how compensation contracts of CEOs shape incentives and affect risk-taking behaviour. We examine how CEOs having varying risk appetites approach merger and acquisition (M&A) deals differently due to incentives driven by their compensation structure. Relying on vega, the sensitivity of executive’s portfolio to a one percent change in volatility of stock returns, we document that acquirers and targets behave differently vis-à-vis their compensation. We show that longer time to completion is related to the target vega (and not bidder vega). We find that a more risk-taking CEO (as encouraged by vega) selling his firm would delay completing a deal by a significant three weeks. We conjecture that target CEOs choose to delay deal completion to look for better bids that tally their need to change their portfolio of own company holdings.

Next, we link executive compensation, mergers and acquisitions and environmental, social and governance in one framework that produces new insights into how CEO incentives yield sub-optimal investment decisions. We gather a sample of 1,280 mergers (M&A) over the 1993-2018 and use CEO wealth sensitivity to stock price volatility (vega) as a proxy for risk taking behaviour. We establish that there is a shift in the relation between CSR rating and cumulative abnormal announcement returns of M&As deals. After 2008, the market for corporate control no longer rewards commitment to more CSR activities. We examine how our sample of mergers are performing in comparison with a matched sample of non-bidding firms vis-à-vis their environmental, social and governance (ESG) profiles over the long-term. More CSR commitment is not translating into shareholders and stakeholders better long-term returns if the firms participate in M&As. Moreover, we investigate how do bidder and target CSR ratings as well as management risk taking incentives (proxied by VEGA) affect deal total synergy estimated around the announcement day. Our results show that firms with lower CSR ratings yield more synergy gains, which are not related to both bidder and target risk-taking incentives.

Finally, we provide new evidence related to the debate whether corporate social responsibility (CSR) strategies intrinsically benefit organizations and contribute to wealth creation. We utilize a sample of M&A deals spanning the period 1993 to 2018 of target firms with different CSR ratings and investigate the effect of CEOs’ executive compensation driven incentives. Our main finding is that Low CSR firms becoming targets of M&A contests in the subperiod post-2008 record the highest cumulative average abnormal returns (compared to High CSR over the same period and other subsamples). We report that Low CSR firms with High Vega target CEOs specifically perform better in corporate control contests in later years. We justify this as Low CSR firms are characterized by lower governance and more agency costs where management seeks benefit its own interests instead of being considerate for the stakeholders at large. Insider trading may be amplified at these firms with low governance, but advancements in insider trading regulation altered this effect allowing for better valuation of target firms in later years.