Do CEOs in Mergers Trade Power for Premium? Evidence from "Mergers of Equals"

Abstract

I analyze CEO incentives to negotiate shared control in the post- merger go vernance of the surviving firm. In order to do this, I study abnormal returns in a sample of of equals transactions in which the two firms are approximately equal in post- merger board representation. These transactions are friendly mergers generally characterized by pre- merger negotiations that result in both greater shared control (board and management) and more equal sharing of merger gains between the two firms. On average, the value created measured by combined event returns is no different between transactions with equal board representation and a matched sample of transactions. However, target shareholders capture less of the gains measured by event returns in transactions with shared governance. Moreover, both the value created and target shareholders' share of the gains are systematically related to variables representing post- merger control rights. Also, shared governance is more likely in transactions in which CEOs face greater incentives for control. The evidence suggests that CEOs trade power for premium by negotiating shared control in the merged firm in exchange for lower shareholder premiums.