Are Acquisition Premiums Lower Because of Target CEOs' Conflicts of Interest?

Charles A. Dice Center Working Paper No. 2010-8

Fisher College of Business Working Paper No. 2010-03-008

38 Pages Posted: 21 Apr 2010 Last revised: 12 Aug 2014

Leonce Bargeron

University of Kentucky - Gatton College of Business and Economics

Frederik P. Schlingemann

University of Pittsburgh - Finance Group; Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Chad J. Zutter

University of Pittsburgh - Finance Group

Date Written: April 21, 2010

Abstract

CEOs have a conflict of interest when their company is the target of an acquisition attempt: They can bargain for private benefits, such as retention by the acquirer, rather than for a higher premium to be paid to their shareholders. We find that target CEO retention by the bidder does not appear to be driven by the CEO bargaining for his own interests at the expense of shareholders. Retention is not associated with a lower premium. Retention is more likely when it is more valuable to the bidder in running the merged firm, in that the CEO is more likely to be retained when she has skills and knowledge that bidder executives do not have and when the incentives of target insiders are well aligned with those of target shareholders. Regardless of retention, shareholders of acquired firms whose CEO is at retirement age receive lower premiums than shareholders of acquired firms with younger CEOs. This lower premium seems to be explained by the apparent reduced acquisition value of firms led by retirement age CEOs rather than by the target CEO conflict of interest.

Keywords: Private Equity Acquisitions, CEO Retention, Acquisition Premiums, Management Buyouts, Mergers

JEL Classification: G30, G34

Suggested Citation

Bargeron, Leonce and Schlingemann, Frederik P. and Stulz, René M. and Zutter, Chad J., Are Acquisition Premiums Lower Because of Target CEOs' Conflicts of Interest? (April 21, 2010). Charles A. Dice Center Working Paper No. 2010-8; Fisher College of Business Working Paper No. 2010-03-008. Available at SSRN: https://ssrn.com/abstract=1593652

Leonce Bargeron

University of Kentucky - Gatton College of Business and Economics ( email )

Lexington, KY 40506
United States
859-257-4397 (Phone)

Frederik Paul Schlingemann

University of Pittsburgh - Finance Group ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States
(412) 648 1847 (Phone)
(412) 648 1693 (Fax)

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Chad J. Zutter

University of Pittsburgh - Finance Group ( email )

352 Mervis Hall, Katz GSOB
University of Pittsburgh
Pittsburgh, PA 15260
United States
412-648-2159 (Phone)
412-648-1693 (Fax)

HOME PAGE: http://www.pitt.edu/~czutter/

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