How do CEOs Matter? The Effect of Industry Expertise on Acquisition Returns
Arizona State University - W. P. Carey School of Business
Stockholm School of Economics - Department of Finance; London School of Economics & Political Science (LSE) - Financial Markets Group
April 15, 2012
We show how CEO characteristics affect the performance of acquiring companies in diversifying takeovers. When the CEO of the acquiring company has experience in the target company’s industry, abnormal announcement returns to his company are between two and three times higher than those generated by a CEO who is new to the industry. This performance is mainly driven by an experienced CEO’s ability to capture a larger fraction of the surplus. Industry-expert CEOs are able to redistribute financial surplus in favor of their shareholders by negotiating better deals and by paying a lower premium for the target company. This effect is particularly pronounced in environments with high information asymmetry and in bilateral negotiations compared to auctions. We also find that industry-expert CEOs on average select low-surplus deals. We argue that this evidence is consistent with industry experts having superior negotiation ability.
Number of Pages in PDF File: 58
Keywords: CEO characteristics, CEO experience, bargaining ability, mergers and acquisitions
JEL Classification: G30, G32, G34, J24, M59working papers series
Date posted: July 24, 2010 ; Last revised: April 19, 2012
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