NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

CEO Preferences and Acquisitions

CEOs' retirement preferences have a significant impact on firms' takeover decisions and on shareholder value.

The careers of most target firms' CEOs suffer after an acquisition. Mergers frequently force target CEOs to retire early, and the older the CEO, the more likely the merger is to end a career entirely. For CEOs, the private merger costs are the forgone benefits of staying employed until their planned retirement date.

In CEO Preferences and Acquisitions (NBER Working Paper No. 17663), Dirk Jenter and Katharina Lewellen find that target CEO preferences affect merger patterns. Using acquisition data on 5,537 public U.S. firms from 1992 to 2008, the researchers determine that the likelihood of a takeover bid increases sharply when the target CEO reaches age 65. Controlling for CEO and firm characteristics, the implied probability that a firm receives a takeover bid is close to 4 percent per year for CEOs between the ages of 56 and 65, but it increases to 6 percent for those over the age of 65. This corresponds to a 50 percent increase in the odds of receiving a bid. Bidders thus are more likely to target firms with retirement-age CEOs, possibly because of these CEOs' reduced resistance to takeovers. The increase in takeover activity appears precisely at the age-65 threshold, with no gradual increase as CEOs approach retirement age, ruling out many alternative explanations.

Jenter and Lewellen also examine the effect of target CEOs' retirement preferences on takeover premiums. CEOs are concerned about shareholder value because they themselves hold equity in their firms and because of pressure from boards to maximize shareholder wealth. This implies that a CEO with lower private costs will require a smaller gain for shareholders to approve a merger deal. Thus, if retirement-age CEOs face lower private costs, they allow more mergers to proceed, and the incremental deals generate lower shareholder gains on average. Consistent with this prediction, observed takeover premiums and target announcement returns are significantly lower when target CEOs are above 65. Controlling for firm, CEO, and deal characteristics, the takeover premium measured from one month before the first bid announcement to the final offer price is 10 percentage points lower when the target firm has a retirement-age CEO. This is a large reduction relative to the average takeover premium of 32 percent. Overall, Jenter and Lewellen's findings suggest that CEOs' retirement preferences have a significant impact on both bidders' and targets' takeover decisions and, ultimately, on shareholder value.

--Matt Nesvisky

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