Do Target CEOs Trade Premiums for Personal Benefits? Evidence from the Last Two Merger Waves

Abstract

Using a sample of 687 completed M&A transactions from 1994 to 2010, with the targets covered by Execucomp and with hand-collected data for target CEO retention and the severance payments received by non-retained target CEOs, we uncover a strong negative relation between target CEO retention and the takeover premiums received by target shareholders. For an average size target, the reduction in takeover premium due to the retention of the target CEO translates into a large value loss of US$ 315-350 million to the target shareholders. When the target CEO was not retained, we also document a negative relation between the relative importance of the severance pay received by the target CEO and the takeover premium received by the target shareholders. Taken together, these evidences suggest that target CEOs bargain shareholder values for their personal benefits during corporate takeovers. Our findings are robust to a number of robustness tests.