CEO Preferences and Acquisitions
Dirk Jenter
Stanford Graduate School of Business; National Bureau of Economic Research (NBER)Katharina Lewellen
Dartmouth College – Tuck School of BusinessDecember 2011
Rock Center for Corporate Governance at Stanford University Working Paper No. 105
Abstract:
This paper explores the impact of target CEOs’ retirement preferences on the incidence, the pricing, and the outcomes of takeover bids. Mergers frequently force target CEOs to retire early, and CEOs’ private merger costs are the forgone benefits of staying employed until the planned retirement date. Using retirement age as an instrument for CEOs’ private merger costs, we find strong evidence that target CEO preferences affect merger patterns. The likelihood of receiving a takeover bid increases sharply when target CEOs reach age 65. The probability of a bid is close to 4% per year for target CEOs below age 65 but increases to 6% for the retirement-age group, a 50% increase in the odds of receiving a bid. This increase in takeover activity appears discretely at the age-65 threshold, with no gradual increase as CEOs approach retirement age. Moreover, observed takeover premiums and target announcement returns are significantly lower when target CEOs are older than 65, reinforcing the conclusion that retirement-age CEOs are more willing to accept takeover offers. These results suggest that the preferences of target CEOs have first-order effects on both bidder and target behavior.Keywords: takeover bids, CEO retirement preferences and acquisitions, mergers & acquisitions
JEL Classifications: G32, G34, G35
Tags: corporate governance, Corporate Strategy, Rock Center for Corporate Governance, Stanford Research-Working Paper