CEO Preferences and Acquisitions
The Harvard Law School Forum on Corporate Governance and Financial Regulation 2012-06-25
In our recent NBER working paper, CEO Preferences and Acquisitions, we test whether target CEOs’ retirement preferences affect the incidence, the pricing, and the outcomes of takeover bids. If mergers force target CEOs to retire early, then the CEOs’ private merger costs are the forgone benefits of staying employed until the planned retirement date. Though retirement plans differ across individuals, research in labor economics shows that a disproportional fraction of workers retires at the age of 65 (we observe the same phenomenon for CEOs). This age-65 effect cannot be fully explained by monetary incentives, including social security benefits or Medicare, which suggests behavioral explanations related to customs or social norms. If CEOs similarly favor 65 as retirement age, this preference should be reflected in their private merger costs, and – provided that these costs affect merger decisions – in the observed merger patterns. Specifically, one should observe an increase in merger activity as CEOs approach 65, or a discrete jump in this activity at the age-65 threshold.
We find strong evidence that target CEOs’ retirement preferences affect merger patterns. In data on U.S. public firms from 1992 to 2008, 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% per year for CEOs below the retirement age (e.g., in age groups 56-60 and 61-65), but it increases to 6% for the retirement-age group (above age 65). This corresponds to a 50% increase in the odds of receiving a bid, and the effect is statistically significant at the 1% level. The increase in takeover activity appears abruptly at the age-65 threshold, with no gradual increase as CEOs approach retirement age. The effect is similar whether all bids or only successful bids are included, and it remains economically large and significant even when CEO age and age squared are included separately as controls. These results show that bidders are more likely to target firms with retirement-age CEOs, possibly due to these CEOs’ weaker expected resistance against takeover bids.