Making money on bad deals

Sounds good, eh? Well, it helps if you're the CEO of a company that makes a lousy acquisition. A study of 370 mergers found that while shareholders might lose money after the deal, the CEO often comes out ahead. The study was published by the Journal of Fianance and summarized by Deal Book:

Although a bad merger may lower the value of their company stock and options, these chiefs usually get new stock and option grants after the deal that more than make up for the other declines. “In many cases,” the study said, “the value of the flow of new grants after an acquisition can swamp any incentive effect provided by the C.E.O.’s pre-acquisition portfolio.” As a result, the study’s authors conclude, C.E.O.’s have a personal economic incentive to go ahead with a questionable merger — because even if it is a loser, they will probably still win.

The study was done Jarrad Harford of the University of Washington Business School in Seattle and Kai Li from the Sauder School of Business at the University of British Columbia and covered mergers from 1993 to 2000.