CEO Turnover after Acquisitions: Do Bad Bidders get Fired?

Abstract

Previous research has documented that the external control market disciplines managers who make valuereducing acquisitions. This paper finds that internal control mechanisms also discipline managers who make value-destroying acquisitions. We find a strong inverse relation between the returns to acquiring firms and the likelihood that their CEOs are subsequently fired. No significant relation exists between the probability that "bad bidders" get fired and various corporate governance characteristics, including the size and structure of boards. The results indicate that internal governance mechanisms discipline managers who stray from value-maximization. It also suggests that firms "choose" these mechanisms optimally such that no empirical relation exists between governance structure and the probability that bad bidders are fired.Classification code: G34.

Management Forecast Quality and Capital Investment Decisions

“…Although investment banks often play an advisory role in important phases of the acquisition, the ultimate responsibility for the acquisition valuation process and the final investment decision rests with the acquirer's management. This view is supported by prior research (Lehn and Zhao 2006), which shows that the acquirer's manager experiences elevated turnover probabilities following poor acquisitions.…”

“…Following a large body of prior research (e.g., Asquith, Bruner, and Mullins 1983;Jensen and Ruback 1983;Lehn and Zhao 2006;Masulis et al 2007; Francis and Martin 2010), we use the stock return around the acquisition announcement to proxy for the quality of the investment decision. This approach assumes that the market incorporates information in stock prices efficiently, so that the announcement return is an unbiased estimate of the impact of an acquisition on the wealth of acquiring-firm shareholders (Moeller, Schlingemann, and Stulz 2004).…”

Firm size and the effectiveness of the market for corporate control

“…In total, it appears that CCAR is properly measuring the change in shareholder wealth of the observations. Lehn and Zhao (2006) study the relationship between acquisition performance and CEO turnover. Their results show that top executives are more likely to be replaced in firms that make bad bids.…”

“…A firm is assigned to a size quintile based on the level of sales reported at the end of the fiscal year immediately following the last acquisition. More specifically, the quintiles are calculated separately in each of the 3 In comparison, Lehn and Zhao (2006) observe acquirers for five years after the first acquisition. 4 Much of the analysis in this paper was replicated using the dollar change in shareholder wealth, rather than the percent change.…”

Size, ownership and the market for corporate control

“…Offenberg (2009-this issue) draws inspiration from the findings of Moeller et al (2004) and returns to a question first posed by Mitchell and Lehn (1990) and Lehn and Zhao (2006). In particular, Offenberg notes the evidence from Moeller et al (2004) pointing to wealth destruction being concentrated in large acquisitions.…”