Founder CEOs and Acquirer Returns: Evidence from IPO Firms

Abstract

Drawing from the literature on entrepreneurial overconfidence and M&As, we argue that founder CEO-managed firms perform worse than professional CEO-managed firms when they participate in M&A transactions. We test our predictions using a sample of acquisitions by newly listed US public firms from 2000 to 2012. Consistent with our arguments, we find that acquisitions led by founder CEOs experience lower abnormal returns compared with acquisitions led by professional CEOs. We also find that the negative relationship between founder CEOs and abnormal returns is amplified by CEOs’ M&A experience. We rule out alternative interpretations, including private benefits of control and founder CEOs’ potentially inferior M&A skills. The results are consistent across various robustness checks that control for potential selection issues and other endogeneity concerns.

Keywords: Founder CEO, Overconfidence, M&A, Corporate Governance, IPO firms

JEL Classification: G34, M13, M50