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

Fisher College of Business Working Paper No. 2012-03-026

Charles A. Dice Center Working Paper No. 2012-26

47 Pages Posted: 6 Dec 2012 Last revised: 10 Feb 2017

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)

Chad J. Zutter

University of Pittsburgh - Finance Group

René M. Stulz

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

Date Written: May 24, 2013

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

Suggested Citation

Bargeron, Leonce and Schlingemann, Frederik P. and Zutter, Chad J. and Stulz, René M., Does Target CEO Retention in Acquisitions Involving Private Equity Acquirers Harm Target Shareholders? (May 24, 2013). Fisher College of Business Working Paper No. 2012-03-026. Available at SSRN: https://ssrn.com/abstract=2185574 or http://dx.doi.org/10.2139/ssrn.2185574

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

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/

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

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