Decision making in acquisitions: The effect of outside directors' compensation on acquisition patterns

This article examines how the compensation paid for outside directors affects firms ’ acquisition behavior. Using panel data of Standard & Poor’s 1500 firms between 1996 and 2002, the authors find that stock and stock option pay for outside directors are related in an inverted U-shaped man-ner to a firm’s acquisition rate and that for stock options, this relationship is moderated by board composition. Their findings suggest a dual agency model of corporate governance, according to which not only executives ’ incentives but also outside directors ’ incentives should be aligned with the shareholder value creation