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Are Acquisition Premiums Lower because of Target CEOs' Conflicts of Interest?

Author

Listed:
  • Bargeron, Leonce L.

    (University of Pittsburgh)

  • Schlingermann, Frederik P.

    (University of Pittsburgh and Erasmus University Rotterdam)

  • Stulz, Rene M.

    (Ohio State University and ECGI)

  • Zutter, Chad J.

    (University of Pittsburgh)

Abstract

CEOs have a conflict of interest when their company is the target of an acquisition attempt: They can bargain for private benefits, such as retention by the acquirer, rather than for a higher premium to be paid to their shareholders. We find that target CEO retention by the bidder does not appear to be driven by the CEO bargaining for his own interests at the expense of shareholders. Retention is not associated with a lower premium. Retention is more likely when it is more valuable to the bidder in running the merged firm, in that the CEO is more likely to be retained when she has skills and knowledge that bidder executives do not have and when the incentives of target insiders are well aligned with those of target shareholders. Regardless of retention, shareholders of acquired firms whose CEO is at retirement age receive lower premiums than shareholders of acquired firms with younger CEOs. This lower premium seems to be explained by the apparent reduced acquisition value of firms led by retirement age CEOs rather than by the target CEO conflict of interest.

Suggested Citation

  • Bargeron, Leonce L. & Schlingermann, Frederik P. & Stulz, Rene M. & Zutter, Chad J., 2010. "Are Acquisition Premiums Lower because of Target CEOs' Conflicts of Interest?," Working Paper Series 2010-8, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2010-8
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    Cited by:

    1. Heitzman, Shane, 2011. "Equity grants to target CEOs during deal negotiations," Journal of Financial Economics, Elsevier, vol. 102(2), pages 251-271.
    2. Dirk Jenter & Katharina Lewellen, 2015. "CEO Preferences and Acquisitions," Journal of Finance, American Finance Association, vol. 70(6), pages 2813-2852, December.
    3. Dang, Man & Henry, Darren & Hoang, Viet Anh Duong, 2017. "Target CEO age, ownership decisions, and takeover outcomes," Research in International Business and Finance, Elsevier, vol. 42(C), pages 769-783.
    4. Qiu, Buhui & Trapkov, Svetoslav & Yakoub, Fadi, 2014. "Do target CEOs trade premiums for personal benefits?," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 23-41.

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