The Link Between the Acquisitions Market and the Market for CEOs

Abstract

Two empirical literatures tie the displacement of CEOs of widely-held companies to the poor performance of their firms - the turnover and mergers and acquisitions (M&A) literatures. In this paper we demonstrate a strong link between CEO turnover and friendly acquisitions of target firms in the S&P 500 between 1992 and 2004. We find that acquisitions and internal CEO turnover are most likely to occur at the same point in a CEO’s tenure, roughly five years after her initial appointment. We conjecture that deals are potential alternatives to CEO dismissal by the board or imminent CEO retirement. We explore interactions among CEO dismissals, retirements and resignations, and acquisitions on the one hand, and firm performance and CEO tenure on the other. We also investigate more specific hypotheses relating tenure to a CEO’s age, status as an inside or outside appointee, and the level of deal activity in the M&A market. Among our key findings is that the probability of a deal remains constant over the upper half of the age distribution of our sample CEOs, even though their probability of retiring increases sharply. This suggests that - contrary to our conjecture - impending retirement is not among the stronger incentives driving the management of target firms to seek friendly buyers. Finally, this paper contributes on the methodological level by comparing multinomial logistic regression - the traditional methodology of turnover research - to competing risk regression, a methodology adapted from epidemiological and medical research and recently introduced into the empirical finance literature.

JEL Classification: K22, M12, M51