Are Acquisition Premiums Lower Because of Target CEOs' Conflicts of Interest?
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
April 21, 2010
Charles A. Dice Center Working Paper No. 2010-8
Fisher College of Business Working Paper No. 2010-03-008
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.
Number of Pages in PDF File: 38
Keywords: Private Equity Acquisitions, CEO Retention, Acquisition Premiums, Management Buyouts, Mergers
JEL Classification: G30, G34
Date posted: April 21, 2010 ; Last revised: August 12, 2014