Does Target CEO Retention in Acquisitions Involving Private Equity Acquirers Harm Target Shareholders?

Abstract

While there is widespread concern that target CEO retention by a private equity acquirer can result in a lower premium for target shareholders because of the potential conflict of interest of the CEO, it is also possible that target shareholders could benefit from CEO retention because it can increase the performance of the acquired firm and, consequently, increase the premium that the private equity firm is willing to pay. Our evidence does not support the view that CEO retention harms shareholders in acquisitions involving private equity firms. In fact, we show that better performing target CEOs are more likely to be retained in acquisitions by private equity firms and that target shareholders gain an additional 7% to 23% of pre-acquisition firm value compared to when the CEO is not retained. Further, we find no evidence that the target’s value is artificially depressed ahead of a private equity acquisition where the CEO is retained.

Keywords: CEO retention, private equity acquisitions, mergers, acquisition premiums

JEL Classification: G30, G34