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CEO Preferences and Acquisitions

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  • Jenter, Dirk

    (Stanford University)

  • Lewellen, Katharina

    (Dartmouth College)

Abstract

This paper explores the impact of target CEOs' retirement preferences on the incidence, the pricing, and the outcomes of takeover bids. Mergers frequently force target CEOs to retire early, and CEOs' private merger costs are the forgone benefits of staying employed until the planned retirement date. Using retirement age as an instrument for CEOs' private merger costs, we find strong evidence that target CEO preferences affect merger patterns. The likelihood of receiving a takeover bid increases sharply when target CEOs reach age 65. The probability of a bid is close to 4% per year for target CEOs below age 65 but increases to 6% for the retirement-age group, a 50% increase in the odds of receiving a bid. This increase in takeover activity appears discretely at the age-65 threshold, with no gradual increase as CEOs approach retirement age. Moreover, observed takeover premiums and target announcement returns are significantly lower when target CEOs are older than 65, reinforcing the conclusion that retirement-age CEOs are more willing to accept takeover offers. These results suggest that the preferences of target CEOs have first-order effects on both bidder and target behavior.

Suggested Citation

  • Jenter, Dirk & Lewellen, Katharina, 2011. "CEO Preferences and Acquisitions," Research Papers 2089, Stanford University, Graduate School of Business.
  • Handle: RePEc:ecl:stabus:2089
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    References listed on IDEAS

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    1. repec:eee:riibaf:v:42:y:2017:i:c:p:769-783 is not listed on IDEAS
    2. Bebchuk, Lucian & Cohen, Alma & Wang, Charles C.Y., 2014. "Golden Parachutes and the Wealth of Shareholders," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 140-154.
    3. Custódio, Cláudia & Metzger, Daniel, 2014. "Financial expert CEOs: CEO׳s work experience and firm׳s financial policies," Journal of Financial Economics, Elsevier, vol. 114(1), pages 125-154.
    4. Mansi, Sattar A. & Wald, John K. & Zhang, Andrew (Jianzhong), 2016. "Severance agreements and the cost of debt," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 426-444.
    5. Anderson, Ronald W. & Bustamante, Maria Cecilia & Guibaud, Stéphane, 2012. "Agency, firm growth, and managerial turnover," LSE Research Online Documents on Economics 43144, London School of Economics and Political Science, LSE Library.
    6. Peter Cziraki & Moqi Xu, 2014. "Ceo Job Security And Risk-Taking," FMG Discussion Papers dp729, Financial Markets Group.
    7. Ronald W. Anderson & Cecilia Bustamante & Stéphane Guibaud, 2013. "Agency, Firm Growth, and Managerial Turnover," Sciences Po publications info:hdl:2441/2gg54vdji29, Sciences Po.
    8. repec:eee:corfin:v:46:y:2017:i:c:p:186-206 is not listed on IDEAS
    9. Dang, Man & Henry, Darren, 2016. "Partial-control versus full-control acquisitions: Does target corporate governance matter? Evidence from eight East and Southeast Asian countries," Pacific-Basin Finance Journal, Elsevier, vol. 40(PB), pages 251-265.
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    12. repec:oup:rfinst:v:30:y:2017:i:10:p:3581-3604. is not listed on IDEAS
    13. Renneboog, Luc & Vansteenkiste, Cara, 2017. "Leveraged Buyouts : A Survey of the Literature," Discussion Paper 2017-015, Tilburg University, Center for Economic Research.
    14. repec:eee:corfin:v:47:y:2017:i:c:p:88-109 is not listed on IDEAS
    15. repec:eee:pacfin:v:46:y:2017:i:pb:p:292-308 is not listed on IDEAS
    16. Gormley, Todd A. & Matsa, David A., 2016. "Playing it safe? Managerial preferences, risk, and agency conflicts," Journal of Financial Economics, Elsevier, vol. 122(3), pages 431-455.
    17. Kathy Fogel & Liping Ma & Randall Morck, 2014. "Powerful Independent Directors," NBER Working Papers 19809, National Bureau of Economic Research, Inc.
    18. Carline, Nicholas F. & Linn, Scott C. & Yadav, Pradeep K., 2014. "Corporate governance and the nature of takeover resistance," CFR Working Papers 14-01, University of Cologne, Centre for Financial Research (CFR).

    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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