Do Envious CEOs Cause Merger Waves?
“Bobby got a bigger empire… I want one too!”
Click Here To Read: Do Envious CEOs Cause Merger Waves?
Abstract (Via Olin.Wustl.edu)
We develop a model in which CEOs envy each other based on their compensation. When CEO compensation is increasing in the firm’s market value and size, we show that envy can cause merger waves even when the shock that precipitated the first merger in the wave is purely idiosyncratic. The analysis produces numerous predictions, some of which are as follows. First, the earlier acquisitions in a merger wave display higher synergies than the later acquisitions in the wave, so bidder returns will be higher for the earlier acquisitions. Second, earlier acquisitions in a merger wave involve smaller targets than later acquisitions. Third, the gain in compensation for the top management team of the acquiring firm should be higher for earlier acquisitions than for later acquisitions. Fourth, more envious CEOs are more likely to engage in acquisitions and pay higher premia. Fifth, an envy-generated merger wave is more likely in a bull stock market than in a bear market even when there is no mispricing that creates opportunities to time the market, so the quality of bull-market acquisitions is lower than that of bear-market acquisitions. Finally, controlling for the dispersion in firm values, the bull-market-versus-bear-market effect largely disappears. We test the first three predictions and find strong empirical support.
Interesting Conclusions (Via Olin.Wustl.edu)
We have used a simple framework to show that envy among CEOs can generate merger waves even when the economic shock that initiates the wave is purely idiosyncratic to the first firm in the wave. The analysis produces numerous novel empirical predictions, which are summarized below. The first six predictions either appear to have support in the existing empirical literature, or have been confronted with the data in this paper and found to have empirical support. The last three predictions await future testing.
1. Merger waves are more likely in bull stock markets than in bear stock markets.
2. Acquisitions undertaken during bull markets have lower bidder returns than those undertaken during bear markets.
3. If we control for the dispersion in firm values, then the difference in merger activity across bull and bear markets largely disappears.
4. Earlier mergers in a merger wave display higher synergies than later mergers in the wave. Thus, the later mergers in a wave will have lower bidder returns than earlier mergers.
5. Targets in earlier acquisitions in a merger wave will be smaller than those in later acquisitions in the wave.
6. Earlier acquisitions in a wave will result in larger increases in top management compensation than later acquisitions in the wave.
7. An overall implication of our analysis is that greater transparency in executive compensation will elevate the likelihood of an envy-induced merger wave. However, the likelihood of an envy-induced wave is diminished if the CEOs of early acquirers have lower compensation than other CEOs.
8. More envious CEOs are more likely to engage in takeovers and pay higher acquisition premiums than less envious CEOs.
9. The proportion of acquisitions undertaken by non-envious CEOs will be lower during merger booms than during other periods.
