Abstract
Withdrawn acquisition bids provide a unique setting to examine the market response to positive revelations of a CEO’s quality. This study focuses on a hand-collected sample of acquirer CEOs who withdraw rather than raise an acquisition bid when the price becomes increasingly expensive (the Restraint Sample). The unwillingness to increase the offer price may convey favorable signals regarding the CEO’s skill, preference for private benefits, and predisposition to overconfidence. Firms in the Restraint Sample earn 5% higher withdrawal returns than a control group of firms that withdraw for other reasons. Moreover, the market response to the withdrawal is higher when CEO quality is uncertain and CEO discretion is high. Information on CEO quality also translates to better labor market outcomes: CEOs in the Restraint Sample are less likely to be replaced and more likely to advance to a CEO role at a larger firm than a control group of CEOs. The results of this paper indicate that both the capital and labor markets attach significant value to CEO-specific information, suggesting that unobservable qualities of a CEO can meaningfully impact firm outcomes.
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