Lifecycles and the Firm

As Joan Hemingway nicely illustrated, firms ought to disclose facts about their managers which are likely to influence stock purchasing decisions, even if those facts are otherwise private and personal.  Now, from a different direction, comes further evidence of the point that managers’ self-interested goals can influence their firm’s disposition.  In CEO Preferences & Acquisitions, Jenter and Lewellen take a look at the relationship between CEO retirement and “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.”

A few thoughts.

1.  As Brian Quinn noted, this is exactly what seemed to be going on in Smith v. Van Gorkom.

2.  The paper includes a nice set of confounding controls, but it’d be useful to have compared founding- with non-founding-CEOS.  At least anecdotally, one hears often of the founding CEO seeking cash out his sweat in a swan-song merger – and that kind of behavior seems less pernicious than a caretaker selling the company to pad her nest.  In the authors’ defense, I’d imagine thatin this fortune 500 dataset there weren’t many such originating great leaders.

3.  It’d be surprising if this common-sense result wasn’t already priced into the acquiring company’s shares, which might make it difficult to truly control for a recent rise in company performance against the market basket.

4.  But if #3 isn’t right, I have a strong sense that I know what my new investment strategy would like.  Someone want to start a corporate-executive retirement watch list with me?  There are models available.

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2 Responses

  1. Ben says:

    This isn’t Smith v. Van Gorkom at all!

    The problem isn’t that older CEOs are giving the company away for peanuts to “cash out.” It’s more along the lines of: young target-company CEO evades a cost-justified merger that is worth a lot to shareholders, but not a lot to her given how much she values staying remains at the helm for a while.

    And how could it be otherwise- retirement-age CEOs, like shareholders, don’t care at all about a change in control but for the control premium, ie, they’ll both take a deal if it values the company higher than current trading (assuming the retirement-age CEO owns shares).

  2. Lee says:

    Perhaps the younger CEO requires an “unreasonable” premium to yield control of the company to another. It’s also possible that an older CEO has no succession plan in place and a merger solves the problem.