Performance Feedback and Acquisition Decisions: The Moderating Role of CEO Underpayment

This study examines how relative CEO underpayment influences the effect of performance feedback on acquisition decisions. Drawing on social comparison theory and the behavioral theory of the firm (BTOF), the study posits that CEOs who are underpaid relative to their comparable peers are inclined to choose a strategy which is helpful in achieving pay equity and the self-interested motive, in turn, moderates the relationship between performance feedback and acquisition decisions. By analyzing data on acquisition deals completed by U.S. manufacturing firms from 2001 to 2015, I found that CEO underpayment weakens the negative relationship between negative performance feedback and acquisitions. This finding suggests that when CEOs face dual hardships of underperformance and underpayment, they may prioritize personal motives to restore their pay standing and thus select acquisition as a solution to the performance decline of their organizations.