How do CEOs Matter? The Effect of Industry Expertise on Acquisition Returns

67 Pages Posted: 24 Jul 2010 Last revised: 1 Jun 2013

See all articles by Claudia Custodio

Claudia Custodio

Imperial College London; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Daniel Metzger

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); European Corporate Governance Institute (ECGI); London School of Economics & Political Science (LSE) - Financial Markets Group

Date Written: May 1, 2013

Abstract

This paper shows how chief executive officer (CEO) characteristics affect the performance of acquirers in diversifying takeovers. When the acquirer's CEO has previous experience in the target industry, the acquirer's abnormal announcement returns are between 1.2 and 2.0 percentage points larger than those generated by a CEO who is new to the target industry. This outcome is driven by the industry-expert CEO's ability to capture a larger fraction of the merger surplus. Industry-expert CEOs typically negotiate better deals and pay a lower premium for the target. This effect is stronger when information asymmetry is high and in bilateral negotiations compared to auctions. We also find that industry-expert CEOs on average select lower surplus deals. This evidence is consistent with industry-expert CEOs having superior negotiation skills.

Keywords: CEO characteristics, CEO experience, bargaining ability, mergers and acquisitions

JEL Classification: G30, G32, G34, J24, M59

Suggested Citation

Custodio, Claudia and Metzger, Daniel, How do CEOs Matter? The Effect of Industry Expertise on Acquisition Returns (May 1, 2013). Available at SSRN: https://ssrn.com/abstract=1647073 or http://dx.doi.org/10.2139/ssrn.1647073

Claudia Custodio

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Daniel Metzger (Contact Author)

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

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

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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