Target CEO Research Articles

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

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.

CEO Narcissism and the Takeover Process: From Private Initiation to Deal Completion

CEO narcissism affects the M&A process. More narcissistic target CEOs obtain higher bid premiums. Acquirer shareholders react less favorably to a takeover announcement when the target CEO is more narcissistic. Among acquiring CEOs, narcissism is associated with initiating deals and negotiating faster. Higher narcissism in both target and acquirer CEOs is associated with a lower probability of deal completion. Our results highlight also the importance of the target to acquirer CEOs relative level of narcissism. To obtain these results, narcissism is measured by the prevalence of personal pronoun usage in more than 1,700 transcripts of CEO speech.(revised version)

Managerial horizons in stock financed mergers

Abstract We examine managerial decision horizons for target and acquirer firms in stock financed mergers and acquisitions. We find that acquirer CEOs have longer decision horizons than target firm CEOs in stock financed mergers. Acquirer CEOs in cash financed mergers and acquisitions also have longer decision horizons than target CEOs. Acquirer CEOs in both stock and cash financed mergers have significantly higher proportions of equity based compensation and significantly lower proportions of cash based compensation than target CEOs. In logistic regressions, measures of decision horizons for target and acquirer CEOs are not significantly related to the odds of stock financing in mergers and acquisitions. Moreover, measures of managerial decision horizons are not uniformly higher for stock acquirers or uniformly lower for stock targets on comparison with CEOs of firms of similar size. Our results do not offer strong support to the implications from the Shleifer and Vishny theory on the rationale for stock financed acquisitions.

THE IMPLICATIONS OF CORPORATE ACQUISITIONS FOR THE CAREERS OF ACQUIRING AND TARGET CEOS

This paper addresses the postacquisition career fates of acquiring and target CEOs from a theoretical vantage emphasizing their dynamic interrelationship. The new concept of dyadic relative status—...

On the Importance of Golden Parachutes

In acquisitions, target CEOs face a moral hazard: any personal gain from the deal could be offset by the loss of the future compensation stream associated with their jobs. Larger, more important, parachutes provide greater relief for these losses. To explicitly measure the moral hazard target CEOs face, we standardize the parachute payment by the expected value of their acquisition-induced lost compensation. We examine 851 acquisitions from 1999-2007, finding that more important parachutes benefit target shareholders through higher completion probabilities. Conversely, as parachute importance increases, target shareholders receive lower takeover premia while acquirer shareholders capture additional rents from target shareholders.

Stock Option Grants to Target CEOS During Private Merger Negotiations

Unscheduled stock options to target CEOs are a non-trivial phenomenon during private merger negotiations. In 920 acquisition bids during 1999-2007, over 13% of targets grant them. These options substitute for golden parachutes and compensate target CEOs for benefits they forfeit because of the merger. Targets granting unscheduled options are more likely to be acquired but they earn lower premiums. Consequently, deal value drops by $62 for every dollar target CEOs receive from unscheduled options. Conversely, acquirers of targets offering these awards experience higher returns. Therefore, deals involving unscheduled grants exhibit a transfer of wealth from target shareholders to bidder shareholders.

Do Efficient Firms Make Better Acquisitions?

Corporate control theory suggests mergers and acquisitions protect shareholder value by allowing good managers to take control of the assets of bad managers. It therefore predicts (1) the acquisitions of poorly-managed targets by well-managed bidders will create more value than other acquisitions, and (2) the target CEO is more likely to be replaced when well-managed firms acquire poorly-managed firms. We examine these predictions. We measure how well a firm is managed using frontier efficiency analysis – the method compares the output of each firm to that of a hypothetical best-performing firm with the same inputs and characteristics as the original firm. We find: (1) the market reacts more positively to acquisitions of efficient firms. (2) Acquisitions by efficient firms are more likely to be all-cash deals and less likely to be all-equity deals. (3) The wealth gains to both the target and the acquirer improve as the efficiency difference between the acquirer and the target increases. (4) The target CEO is less likely to be retained by the merged firm when the efficiency difference increases. (5) The market reacts more negatively to target CEO retention when the target is less efficient than the acquirer.

Do Target CEO's Sell Out Their Shareholders to Keep Their Job in a Merger?

CEOs have a potential conflict of interest when their company is acquired: They can bargain to be retained by the acquirer and for private benefits rather than for a higher premium to be paid to the shareholders. We investigate the determinants of target CEO retention by the acquirer and whether target CEO retention affects the premium paid by the acquirer. The probability that a CEO is retained increases with a private bidder, the performance of the target, and with the fraction of target shares held by insiders. Regardless of the bidder type, we find no evidence that the premium paid is lower when the CEO is retained by the acquirer. Strikingly, the target stock price increases more at the announcement of an acquisition by a private firm when the CEO is retained than when she is not. This result holds whether the private acquirer is a private equity firm or an operating company and for management buyouts.

Do Target CEOs Sell Out Their Shareholders to Keep Their Job in a Merger?

CEOs have a potential conflict of interest when their company is acquired: they can bargain to be retained by the acquirer and for private benefits rather than for a higher premium to be paid to the shareholders. We investigate the determinants of target CEO retention by the acquirer and whether target CEO retention affects the premium paid by the acquirer. The probability that a CEO is retained increases with a private bidder, the performance of the target, and with the fraction of target shares held by insiders. Regardless of the bidder type, we find no evidence that the premium paid is lower when the CEO is retained by the acquirer. Strikingly, the target stock price increases more at the announcement of an acquisition by a private firm when the CEO is retained than when she is not. This result holds whether the private acquirer is a private equity firm or an operating company and for management buyouts.

When Target CEOs Contract with Acquirers: Evidence from Bank Mergers and Acquisitions

This paper investigates the impact of the target chief executive officer's (CEO) postmerger position on the purchase premium and target shareholders' abnormal returns around the announcement of the deal in a sample of bank mergers during the period 1990-2004. We find evidence that the target shareholders' returns are negatively related to the postmerger position of their CEO. However, these lower returns are not matched by higher returns to the acquirer's shareholders, suggesting little or no wealth transfers. Additionally, our evidence suggests that the target CEO becoming a senior officer of the combined firm does not boost the overall value of the merger transaction.

Agent or Steward: The Target CEO in a Hostile Takeover: Can a Condemned Agent be Redeemed?

This article examines the differences, tensions and overlaps between agency and stewardship theories of corporate governance. The context is a hostile bid for Blue Circle Industries, a FTSE 100 company, and the focus is upon its Chief Executive Officer’s actions in response. CEOs occupy a position of pivotal importance during such takeover bids, and it is salient to examine their resultant motivations and payoffs. While agency theory suggests that CEOs may act in self-interested ways, diverging from the interests of shareholders, ongoing stewardship theory sees CEOs as fundamentally honest and caring about their company and shareholders’ interests. The hostile bid is an opportunity for the target CEO to fight at any cost, or to act in the best interests of stakeholders. In examining the target CEO’s actions, this article suggests there is more complexity than these two theories acknowledge and the relationship between them is not one of simple opposition. The article identifies a framework for making sense of CEO/stakeholder relationships, and highlights the importance to boards of understanding how CEOs manage differential stakeholder pressures over time.

Agent or Steward: The Target CEO in a Hostile Takeover.237Can a Condemned Agent be Redeemed?

This article examines the differences, tensions and overlaps between agency and stewardship theories of corporate governance. The context is a hostile bid for Blue Circle Industries, a FTSE 100 company, and the focus is upon its Chief Executive Officer’s actions in response. CEOs occupy a position of pivotal importance during such takeover bids, and it is salient to examine their resultant motivations and payoffs. While agency theory suggests that CEOs may act in self-interested ways, diverging from the interests of shareholders, ongoing stewardship theory sees CEOs as fundamentally honest and caring about their company and shareholders’ interests. The hostile bid is an opportunity for the target CEO to fight at any cost, or to act in the best interests of stakeholders. In examining the target CEO’s actions, this article suggests there is more complexity than these two theories acknowledge and the relationship between them is not one of simple opposition. The article identifies a framework for making sense of CEO/stakeholder relationships, and highlights the importance to boards of understanding how CEOs manage differential stakeholder pressures over time.

Incentive Effects of Illiquid Stock and Option Holdings of Target and Acquirer CEOs

Due to a variety of liquidity constraints, CEOs of U.S. corporations hold highly undiversified portfolios of stock and options of their own firms. This results in an illiquidity discount, measured by the difference between the market value and the executive value of their holdings. We argue that acquisitions offer an effective mechanism for target CEOs to remove many liquidity constraints and reduce or eliminate the illiquidity discount. Following Shleifer and Vishny (2003), we further argue that for overvalued acquirer firms the acquisitions enable acquirer CEOs to improve the long-term value of their illiquid wealth. Using a sample of 250 acquisitions during 1993-2001, we document several incentive effects of illiquid stock and option holdings. Target CEOs who face higher illiquidity discount accept lower acquisition premium and are more likely to leave after the acquisition completes. They also put up lower resistance and speed up the acquisition. Similarly, acquirer CEOs who face higher illiquidity discount pay higher acquisition premium, speed up the acquisition, pursue relatively undervalued targets, and make multiple and diversifying acquisitions using stock payment.

Does operating performance increase post-takeover for UK takeovers? A comparison of performance measures and benchmarks

Using several benchmarks and operating performance measures, the results from this paper suggest that takeovers completed in the UK over the period 1985 to 1993 result in modest improvements in operating performance. Using a matching procedure similar to that employed by Loughran and Ritter [J. Finance 52 (1997) 1823], in which benchmark firms are selected on the basis of several pre-takeover characteristics, the median increase in post-takeover performance for acquiring firms ranges from 0.13% per annum to a statistically significant 1.78% per annum, depending on the definition of operating performance used and choice of deflator. Using the same matching scheme in a Healy et al. [J. Financ. Econ. 31 (1992) 135] methodology, in which post-takeover performance is regressed on a combined target and acquirer pre-takeover performance, reveals larger improvements in operating performance, ranging from 0.80% to a statistically significant 3.1%, again depending on the definition of operating performance employed and deflator chosen. While there is some evidence that factors such as industrial relatedness and the removal of the target CEO have an impact on post-takeover performance, method of payment is found to have an insignificant impact.

TAKEOVERS, MANAGEMENT REPLACEMENT, AND POST-ACQUISITION OPERATING PERFORMANCE: SOME EVIDENCE FROM THE 1980s

In their study of 197 U.S. takeovers from the 1980s, the authors find that the most important determinant of superior post-merger operating performance is whether the target company's management is replaced or retained. When the target CEO is replaced, the post-merger firm's annual cash flow returns outpace industry standards by 2 to 3%. In contrast, when target top management remains after the merger, operating returns do not exceed industry averages. The effect of management replacement is even more pronounced in those cases where the industry is consolidating. But, for those takeovers that are followed by significant investment (and thus presumably in growth industries), management replacement does not make a significant difference in post-acquisition performance.

The Effects of Golden Parachutes on Takeover Activity

The Effects of Golden Parachutes on Takeover Activity

Scapegoating in Baseball

Scapegoating in Baseball