RESEARCH MASTER ECONOMICS AND BUSINESS
ONCE MORE UNTO THE BREACH:
THE APPROACH OF CEO’S RETIREMENT ON
MERGER AND ACQUISITION PERFORMANCE
Author: M.H. Oude Luttikhuis s1868373 1st supervisor: Dr. K.J. McCarthy 2nd supervisor: Dr. P.M.M. de Faria
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ABSTRACT
This study investigates the impact of retiring CEOs on the performance of mergers and acquisitions (M&As). We propose that CEOs who approach retirement make worse than average deals. These CEOs are less likely to be prone to mechanisms that restrain CEOs to make self-interesting deals than are other CEOs. As a result, CEOs who are close to their retirement are free to make final high-risky irreflective deals. Relying on data from 6,757 M&As made by US acquiring firms of which more than one percent were made by CEOs who retired within or after one year of the deal announcement, we found that retiring CEOs indeed make significantly worse deals than other CEOs. Moreover, we show that as the size of a company increases, performance of deals made by retiring CEOs improves but will on average never be better than the performance of deals made by non-retiring CEOs.
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1. INTRODUCTION
The population is aging at a rate without parallel: in 2013, 841 million people, or 11.7% of the world’s population, were over 65. By 2050, this number is likely to more than double, to 2 billion, or to 21.1% of the global population (United Nations, 2013; Kulik et al., 2014). As CEOs often retire at a later age, a greying workforce is to be welcomed in the context of mergers and acquisitions (M&As). Age is positively related to a CEO’s search towards security (Carlsson & Karlsson, 1970; Vroom & Pahl, 1971). Besides, as age increases, a CEO will be less flexible and hence, rigidity and resistant to change will increase (e.g. Child, 1974). For these reasons, younger CEOs will be more inclined to pursue risky strategies than older CEOs. Risk-taking behavior is negatively related to the performance of M&As for the acquiring firms (Malmendier & Tate, 2008). Therefore, older CEOs are less likely to announce a merger or an acquisition (Yim, 2013), and are also less likely to be involved in badly performing M&As. Greying CEOs, therefore, means fewer value-destroying M&As. But what happens when greying CEOs become retiring CEOs?
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hero. If it fails, then it is the successor’s problem. In addition, these ‘all or nothing’ deals are likely to be made not very deliberately. When retirement is approaching the CEO may lose their initial sense of excitement and adventure (De Vries, 2003). Therefore, these CEOs may start to run on ‘automatic pilot’ or may prefer action over reflection to get back a sense of excitement and adventure.
We also propose that the effect of retiring CEOs on M&A performance is depending on the size of the company. We argue that as larger companies generally have less ownership and have more resources than smaller companies (Moeller, Schlingemann, & Stulz, 2004), agency problems are likely to be higher and CEOs face fewer obstacles to make certain deals. In addition, as larger companies are more important socially, CEOs of these companies are likely to be more prone to hubris (Demsetz & Lehn, 1985). For retiring CEOs, the increasing opportunities to act in a self-interested way and their higher susceptibility to hubris may imply that the negative effect of CEOs’ retirement on M&A performance becomes stronger as company size increases.
To test these hypotheses we built a database of all US M&As, announced and completed between January 1st, 1990, and December 31st, 2012. Next, we use Lexus-Nexus to search for company press releases and get data about CEO retirement. Matching the two databases, we create a sample of 6,757 M&As, of which more than one percent involved a deal made by a CEOs who retired within one year or one year after the deal announcement.
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can be hired (Rosen, 1982; Kostiuk, 1990), which can have a positive impact on M&A performance.
The paper is organized as follows. In Chapter 2, we review prior literature about agency theory and (psychological effects of) retirement. In this chapter, we also discuss the conceptual linkages among types of CEOs (i.e. retiring vs. no retiring CEOs) and acquirer’s M&A performance. Next in Chapter 3, the methods on which we rely are discussed. The results are shown in Chapter 4, and in Chapter 5 the results are discussed. Finally, we provide a conclusion in Chapter 6.
2. LITERATURE REVIEW
2.1 Agency Theory and Mergers and Acquisitions
2.1.1 Principal-Agent Problem
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A particularly costly phenomenon of the agency conflict between shareholders and CEOs is a bad acquisition (Harford, Humphery-Jenner, & Powell, 2012; see Jensen, 1986, for an example). M&A literature focusing on this principal-agent problem argue that self-interested CEOs make deals because of empire building or managerial entrenchment. A CEO may make deals because they want to increase the size of the company. For many CEOs, controlling and managing large companies is perceived as more prestigious than the control and management of smaller companies (Brealey, 2012). The CEO may also want to “expand their empire”, because a larger company means higher CEO payment (e.g., Zhou, 2000; Conyon & Murphy, 2000; Ozkan, 2011). Besides, a CEO may make deals to entrench themselves. Shleifer and Vishny (1989) argue that if a CEO makes ‘manager-specific investments’, he or she can reduce the probability of being replaced, get higher wages, and extract larger perquisites. In addition, according to Jensen (1986) once a CEO is entrenched, and have sufficient free cash flows, he or she is likely to make value-destroying deals, because they gain more from this deal (through empire building and higher payments) than their proportional loss on the merger or acquisition.
To encourage CEOs to act in the interest of the shareholders, CEO behavior should be monitored and incentives should be provided (e.g., Jensen & Meckling, 1976; Fama, 1980). However, as argued by Jensen & Meckling (1976) in general it is impossible to ensure that the CEO will make decisions which are optimal in the perspective of the shareholders. In most agency relationships both the shareholders and the CEO will incur positive monitoring costs. Besides, some divergence of interest between shareholders and CEOs will always remain.
2.1.2 Retirement
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2.2 Process and Type of Retiring CEOs’ Deal-Making
Thus, literature indicates that conflicts of interest can exist between CEOs and shareholders. A number of literature lead us to suggest that the mechanisms reducing agency problems between CEOs and the shareholders are less effective for CEOs who approach retirement. This would imply that, from an agency perspective, CEOs who are close to its retirement are more prone to opportunistic behavior. This self-interested behavior of retiring CEOs can have consequences for the process of deal-making and the type of deals that are made.
Concerning the process of deal-making, retiring CEO are likely to make deals without carefully considering the alternatives. When retirement approaches, CEOs may become aware of the painful realities that comes with retiring. The loss of work, a critical activity in life, means that there is a loss of public exposure, public contact, influence, attention, admiration, or power (De Vries, 2003). This may result in a feeling of isolation or emptiness, and ultimately depression (Portnoi, 1983). And thus, when retirement is approaching the CEO may have lost their initial sense of excitement and adventure. This could imply that the CEO starts to run on ‘automatic pilot’, which means that the CEO is likely to make less reflective decisions with regard to acquiring or merging with other companies. A second possibility is that to get back a sense of excitement and adventure, and forget the depressing thoughts about the losses that may bring retirement, the CEO may prefer action over reflection (De Vries, 2003). In both cases, the deals made by these CEOs are not made very deliberately. Therefore, it is likely that these deals will destroy value for the acquiring firm.
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Florou, 2006; Bilgili, Campbell, & Ellstrand, 2014); the CEO wants to make-his-mark and be known for a particular action he or she performed (Conyon & Florou, 2006). This willingness to leave behind a legacy can be driven by various motives. For example, CEOs whose retirement is approaching may expect retaliation as they have made many ‘victims’ during their time as a CEO. Being a CEO means that you have to make difficult decisions that can– sometimes positively, but mostly negatively–affect the life of others. For example, the acquisition of other companies can lead to a lower number of job positions (Conyon et al., 2002) and as a consequence, people can get fired. As CEOs have a subliminal fear of reprisals (Vries, 1991), CEOs increasingly expect retaliation as the number of ‘victims’ increases (De Vries, 2003). To compensate for the mistakes they made in the past, a CEO may want to take very high risks to have a chance of making a final highly successful deal in order to leave behind a ‘positive legacy’. The willingness to leave behind a legacy can also be driven by goals they did not fulfill during their time as a CEO (De Vries, 2003). For example, a CEO may want to make a kind of deal he or she always dreamed of in their youth.
Pursuing one final deal may not seem to harm the company. However, in making these kind of deals, the CEO itself does barely bear the risks of their decisions: if the deal is successful, the CEO can leave the company as a hero. If it fails, it is the successor’s problem. The high risks the retiring CEOs (can) take when making these deals is likely to negatively affect the performance in M&As (Malmendier & Tate, 2008).
For these reasons, the following is hypothesized:
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2.3 Firm Size
The extent to which retiring CEOs make worse than average deals is likely to vary depending on the size of the company. We argued that retiring CEOs are more prone to opportunistic behavior than are non-retiring CEOs. This opportunistic behavior is likely to be even higher when the size of the company increases. Moeller et al. (2004) argue that because larger companies have more resources, CEOs of these companies face fewer obstacles in making mergers and acquisitions. Besides, Demsetz and Lehn (1985) show that CEOs in larger companies generally have less ownership than CEOs in smaller companies. As the separation of ownership can provide opportunities to engage in opportunistic behavior at the cost of the shareholders (Jensen & Murphy, 1990), it is likely that CEOs of larger companies make more self-interested deals. Thus, retiring CEOs of large companies have even more ‘freedom’ to make one final, high risky deal. As we have argued, this high risky deal can be made because the CEO wants to leave behind a legacy. Since larger companies are more important socially, CEOs of these companies are more prone to hubris (Moeller et al., 2004). Therefore, the willingness to leave behind a legacy, and have a chance to leave the company as a hero, may be stronger for CEOs of larger firms than for CEOs of smaller firms. We hypothesize:
H2: Firm size will increase the negative effect of retiring CEOs on M&A performance
3. METHODS
3.1 Sample
We test our hypotheses using Thomson SDC data. We refine it to include: (1) all merger and acquisitions; (2) announced and completed between January 1st 1990, and December 31st,
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repurchase of own shares, or a spin-off to existing shareholders; (6) where neither the acquirer nor the target is fully or partially owned by public authorities, such as the U.S. government; or (7) where the target and acquirer do not have the same ultimate parent, so as to exclude within-firm consolidations. We exclude the cases for which data about the exogenous variables are missing. In doing so, we create a sample of 6,757 observations.
3.2 Independent Variable
We identify deals done by retiring managers as follows. Firstly, and using Lexus-Nexus to search for company press releases, we create a list of companies whose CEO retired in the period of our analysis. Then, we matched the list of companies with retiring CEOs to the list of mergers and acquisitions. We create a CEO_Retire indicator when the CEO retired within or one year after the announcement of a deal. Using the press-releases to pin-point precise dates, and using the firms from our sample, we identify 70 deals that were announced by CEOs without any long-term commitment to the firm.
3.3 Moderating Variable
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3.4 Dependent Variable
As our dependent variable we employ a measure of M&A performance. There is no consensus on the one-best-way to measure deal performance (Schweizer, 2005; Larsson & Finkelstein, 1999). The event study methodology has, however, become the ‘default’ measure (Haleblian et al., 2009). The event study is an ex-ante market-based estimated performance measure, which suggests that a merger or an acquisition can be assessed by observing the price change in the acquirer’s market value, during a period surrounding the event. This price change is referred to as an abnormal return, and is calculated as the difference between the observed and predicted, or normal return for a security (Brown & Warner, 1980, 1985). Thus, the impact of an event on a firm is measured by the portion of the firm’s returns that is unanticipated by an economic model of anticipated, or normal, returns. We describe M&A performance using Brown & Warner’s (1985) standard event study methodology, and estimate the market adjusted model as:
𝐴𝑅𝑖 = 𝑟𝑖 − 𝑟𝑚
Here, ARi is the acquirer i’s abnormal return–winsorized between 2,5% and 97,5%1 to temper
the effects of outliers–, ri is the stock return on acquirer i, and rm is the return of the S&P 500
market index. The sum of the acquirer’s abnormal returns (ARs) in the relevant event window is the cumulative abnormal return (CARs). We estimate CARs to the acquiring firm, for the period around the merger or acquisition announcement. If no information has leaked out prior to the event, each abnormal return can be calculated on the date it becomes publicly available. Research has shown, however, that information on M&As sometimes leaks out to some market participants before it reaches others (Asquith, 1983; Schwert, 1996). To account for this suggestion, we compute abnormal returns from 5 trading days (or 1 week) before the announcement to 1 trading day after (CAR_5). Since our sample includes frequent bidders, we
1 We compare different models in which we changed the level of winsorizing, varying between no winsorizing and 5%
winsorizing. In this exploratory analysis, we select the model with the lowest Bayesion information criterion (SBC), Akaike
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do not estimate market parameters based on a time period before each bid, because there is a high probability that previous takeover attempts would be included in the estimation period; this would make beta estimations less meaningful.
3.4 Control Variables
We control for a number of firm-, and deal-level variables, because of their potential influence on M&A performance. Thomson SDC database is used to get data about these control variables.
3.4.1 Firm Level
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3.4.2 Deal Level
Two deal level characteristics are included: the relatedness of the deal and whether it is a cross-border or domestic deal. In prior literature, a positive relation between relatedness of a deal and M&A performance is found (e.g., Capon et al., 1988; Kusewitt, 1985; Rumelt 1974, 1982), for example because of the increase in market power (Eckbo, 1983) or greater economies of scale (Datta, 1991). Besides, industry familiarity will reduce the need for CEOs to ‘learn’ the business of the target firm (Hitt, Harrison, & Ireland, 2001), which is key to the successful post-acquisition integration of the acquired business (Roberts & Berry, 1985). To determine whether the target company is similar to the acquiring company, we use SIC codes and create an indicator of relatedness when companies share the same four-digit SIC code (in our model labeled as SIC_4d)2. The first two digits describe the major industry to which a business belongs. The third and fourth digit respectively represents the sub-classification of the business group and specialization.
Second, in the model we include whether it is a domestic or cross-border M&A. In M&As across borders, the board may be confronted with significant difficulties. The acquirers must deal with unfamiliar political, regulatory and industrial conditions, limited information about potential targets, and foreign legal, cultural, and social norms, which create risk for the acquirers (Masulis, Wang, & Xie, 2012; Mitchell, Shaver, & Yeung, 1992). Investing in foreign companies, however, can bring some important advantages for the acquiring company. Main reasons for the increasing internationalization of businesses are the globalizing markets, economic integration of national states, increasing international competition, the technical developments (Heijltjes, Olie & Glunk, 2003), the imperfections in factor, product, and capital markets (e.g., Hymer, 1976), and the access to routines and repertoires rooted in other national cultures and previously not available to the firm (Jemison
2 We conducted an exploratory analysis of the influence of acquiring and target firms sharing the same two-, three-, or
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and Sitkin, 1986; Ghoshal, 1987). For these reasons it is expected that cross-border M&As perform better than domestic takeovers. We program a Crossborder indicator variable if the acquiring firm’s country is different from the target firm’s country.
4. RESULTS
Table 1 presents the means, standard deviations, and correlations among the variables. In this sample, the average M&A performance is negative, indicating that in general acquiring other companies is not a profitable strategy in terms of value creation for the firm3. Approximately
one percent of all deals are made by CEOs who retire within or after one year of the merger or acquisition announcement. Just over half a percent of all deals involves a CEO who leaves the company in the same or after one year of the deal announcement, but does not retire. Of all deals, 17.6% are cross-border deals and 36.2% of the deals made in our sample includes a target firm that operates in the same industry, business group, and specialization as the acquiring firm. The matrix in Table 1 shows a negative correlation between M&A performance and CEOs who are close to its retirement. However, no strong correlation is found. The same holds for the correlations between M&A performance and the control variables, with total assets as an exception. Many variables significantly correlate with the logged total assets, and there are three other significant correlations between two variables. We therefore followed procedures outlined by Belsly, Kuh and Welsch (1980) to test for effects of multicollinearity in the regression analysis.
3 An explanation is given in Fuller, Netter, and Stegemoller (2002). They show that acquiring or merging with private targets
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Table 1. Descriptive Statistics and Correlation Matrixa
Variables Mean s.d. 1 2 3 4 5 6 7 1. Car_51 -0.004 0.08 2. CEO_Retire 0.010 0.10 -0.016 3. CEO_Change 0.006 0.08 0.012 0.084** 4. Crossborder 0.176 0.38 0.012 0.053** 0.027* 5. Sic_4d 0.362 0.48 0.023 -0.016 -0.014 -0.020 6. Log_TA2 0.000 0.91 0.029* 0.112** 0.110** 0.106** 0.002 7. MB_Ratio 546 1903 0.010 -0.004 -0.010 0.005 -0.011 -0.012 8. CEO_Retire x Log_TA2 0.010 0.133 0.004 0.756** 0.123** 0.034** -0.015 0.148** -0.006 a n = 6,757 1 CAR (-5, 1) 2 Mean centered *p < 0.05; ** p < 0.01
Condition indexes are calculated and we examined whether the variance of two or more variables was substantially contributed by high condition indexes. We found that there was no component with a high condition index that would highly contribute to the variance of two or more variables. Thus, the presence of any multicollinearity was not sufficient to warrant concerns about the regression coefficient estimates.
The hypotheses were tested by regressing M&A performance, measured by a five-day CARs winsorized between 2.5% and 97.5%, on the control variables, the independent variable, and the moderating variable. As suggested by Cameron, Gelbach and Miller (2011) and Thompson (2006), we have produced White standard errors which account for two dimensions of within cluster correlation4. More specifically, we allow observations which share an industry or share a year to be correlated. The results of the regression analyses are shown in Table 2. Separate regression equations are tested for three models: (1) all control variables; (2) model without the interaction term; and (3) the full model.
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Table 2. Results of Regression Analysesab
Variables Model 11 Model 22 Model 33
Crossborder 0.0021 0.0029 0.0023 Sic_4d 0.0040* 0.0039* 0.0039* MB_Ratio 0.0000* 0.0000* 0.0000* Log_TA4 0.0026 Deal_Retire -0.013* -0.0369** Deal_Retire x Log_TA4 0.0212** R2 0.0008 0.0010 0.0024 Adjusted R2 0.0003 0.0004 0.0015 F 2.71* 2.41* 2.64* a n = 6,757
b Clustered by year and industry 1 Control variables only 2 Model without interaction term 3 Full model
4 Mean centered * p < 0.05; ** p < 0.01
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the interaction term Deal_Retire x Log_TA, is included. This coefficient indicates that the higher the company’s assets, the better the performance in M&As for retiring CEOs (β = 0.021; p = 0.003). This supports hypothesis 2 in that there is an effect of the interaction term on the performance in M&As. However, the signs are the opposite of what we hypothesized. Furthermore, we see that the coefficient of the direct effect is again significant and becomes more negative (β = -0.037; p = 0.003). This shows support for our hypothesis 1: CEOs who are close to their retirement make worse deals than other CEOs.
5. DISCUSSION
Overall, the results of this study show a negative relation between retiring CEOs and M&A performance. These retiring CEOs are defined as those who announced a deal within one year or one year before retiring. No significant effects on M&A performance were found when CEOs retired two, three, four, or five years after the deal announcement. The results in Table 2 suggest that CEOs who will retire within or one year after the announcement of the deal are likely to be more prone to opportunistic behavior and therefore make final high-risky deals which are generally performing worse than deals made by CEOs whose retirement is not approaching. However, these results could also signify that CEOs who approach retirement performed bad in a deal and as a consequence must retire. Therefore, we tested for the effect of a changing CEO on the performance of M&As. We have programmed a CEO_Change indicator variable, and set it equal to one if the deal was announced by a CEO who left the company within one year or one year after the deal5. Results are shown in Table 3.
5 Again, we use Lexus-Nexus to search for company press releases and get data about CEOs who leave the company (but do
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Table 3. Results of Regression Analyses Including Deal_Changeab
Variables Model 11 Model 22
Crossborder 0.0028 0.0023 Sic_4d 0.0040* 0.0039* MB_Ratio 0.0000* 0.0000* Deal_Change 0.0138 0.0089 Log_TA3 0.0025 Deal_Retire -0.0142* -0.0367** Deal_Retire x Log_TA3 0.0206** R2 0.0020 0.0025 Adjusted R2 0.0011 0.0014 F 2.77** 2.48* a n = 6,757
b Clustered by year and industry
1 Model including CEO_Change, without interaction term 2 Full model including CEO_Change
3 Mean centered
* p < 0.05; ** p < 0.01
We see that CEOs who (have to) leave the company in the same year or one year after announcing a deal do not make worse deals than other CEOs (β = 0.009; p = 0.397). Thus, it is unlikely that CEOs leave the company because they performed badly in the last merger or acquisition they made. In line with the results shown in model 2 and 3 of Table 2, we observe a negative significant effect of Deal_Retire on M&A performance (β = -0.0367; p = 0.003). We can suggest that this negative effect of retiring CEOs on performance in M&As can mainly be attributed to the retirement that is approaching, and the corresponding psychological effects.
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Figure 1. Company Size and M&A Performance for Retiring and Non-retiring CEOs.
Apparently, a larger company is not coherent with increasing possibilities to engage in opportunistic behavior or at least the retiring CEO does not become more prone to the increasing possibility to behave in a self-interested way. In fact, retiring CEOs of larger companies perform better (or less bad) in deal-making than retiring CEOs of smaller companies. A rationale for this is that because larger companies have more resources (Moeller et al., 2004), these companies can and will compensate their CEOs more (e.g., Murphy, 1999). For example, by analyzing the relation between CEO cash compensation and firm sales based on Conference Board data, Baker, Jensen, and Murphy (1988) found that a firm that is 10% larger will pay its CEO about 3% more. The higher compensation could imply that CEOs of larger companies have greater incentives to make value-creating deals, even though retirement is approaching. In addition, as larger companies can pay their CEOs more, they can hire better-qualified CEOs (Rosen, 1982; Kostiuk, 1990), which can have a positive impact on M&A performance.
Our aim of this study was to analyze whether there is a negative effect of CEOs approaching retirement on decisions they would make during this last period as a CEO. In doing so, we focused on the effect of retiring CEOs on performance in M&As. With regard to this relationship, we want make two important notes. First, the third model in Table 2 is
-0,07 -0,06 -0,05 -0,04 -0,03 -0,02 -0,01 0
Lowest Low Middle High Highest
Per for m an ce (CAR)
Company Size (Total Assets)
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significant (F = 2.64; p = 0.015) but the variance explained by the model is fairly low (adjusted R2 = 0.0014). Therefore, it is debatable whether that many retiring CEOs make highly value-destroying deals. As our aim was to show that there is an effect, we did not investigate the actual magnitude of this effect. We suggest future researchers to address this issue by including more variables in the model that are said to affect performance of mergers or acquisitions. For example, as we have argued, age is negatively related to a CEO’s flexibility, change, and risk-taking behavior (Carlsson & Karlsson, 1970; Vroom & Pahl, 1971; Child, 1974). Therefore, younger CEOs are more likely to make many risky deals than are older CEOs. As risk-taking behavior is negatively related to the acquirer’s M&A performance (Malmendier & Tate, 2008), it is expected that there is a positive relation between age and M&A performance. And as retiring CEOs are on average of a higher age than other CEOs, including this variable would increase the negative effect of CEOs who are approaching retirement on the performance of M&As. Future researchers might also consider to include manager level variables such as organizational tenure, job tenure, or M&A experience. By including these variables, one can account for the experience a CEO may gain over time.
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companies are involved in mergers and acquisitions6 and the majority of the studies about M&As found no positive effect of M&As on acquiring firm’s performance (e.g., Moeller & Schlingemann, 2005), investigating the effect of retiring CEOs on the performance of M&As can help in understanding the highly complex puzzle about the success of M&As.
Overall, we suggest that retiring CEOs should not be allowed to perform last-minute M&A deals, especially the retiring CEOs of smaller companies. To make this recommendation more powerful, we suggest future researchers to account for other variables. For example, by accounting for certain manager level variables (e.g., a CEO’s age, organizational tenure, job tenure, or experience in M&As), one can account for the experience CEOs gain over time.
We make several scientific contributions. First, we extend the M&A literature by showing support for the negative effect of retiring CEOs, as opposed to other CEOs, on M&A performance. Second, we contribute to the literature about agency theory. So far, agency theory has solely focused on managers within a company, staying within that company. We extend this theory by focusing on CEOs who will soon leave the company and argue that when retirement is approaching, CEOs may be more susceptible to behave in an opportunistic way. We also argue that CEOs may want to leave behind a legacy. This ‘legacy effect’ could also be applied in other research areas, such as political economics and political science. As it turns out that CEOs close to their retirement indeed perform worse than other CEOs, it can suggest that also for example retiring politicians should not be involved or at least should not have the major voice in decision-making. We also contribute to society. M&As that are “failures” may have a detrimental impact on the employees of the companies. For example, many employees will be fired. By investigating the performance of M&As made by CEOs
6 Cartwright and Schoenberg (2006) show that in 2004 alone 30,000 acquisitions were completed globally. Besides, in 2007
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who are close to their retirement, we show why some mergers or acquisitions may fail while others succeed in creating value for the acquiring firm.
6. CONCLUSION
This study was motivated by an attempt to develop a more fine-grained understanding of the relation between retiring CEOs and the value they create by making deals for acquiring firms. Relying on the agency theory, we argued that CEOs make deals driven by self-interest which are generally not in the best interest of the shareholders. There are mechanisms that will restrain CEOs to make these kind of deals. For example, by making value-destroying deals, compensations may be lower, or worse CEOs have a risk of losing their job. CEOs who are close to retirement may be less susceptible for these mechanisms and thus, agency problems are likely to be higher for companies having a CEO whose retirement is approaching. As a result, we argue that these CEOs are likely to make irreflective deals which are highly risky and may harm the company in the long-term. Besides, we argue that agency problems are higher for larger companies than for smaller companies and thus as the company size increases retiring CEOs may make even worse deals.
Depending on data from 6,757 US deals, we found that CEOs who are close to their retirement indeed make worse than average deals. Besides, we found counterintuitive results for the moderating effect of firm size on the relation between retiring CEOs and M&A performance. We explain this finding by arguing that because larger companies can offer higher compensations, more incentives are provided to promote retiring CEOs making value-creating deals and better-qualified CEOs can be hired.
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Since retiring CEOs generally are of a higher age, have a higher organizational or job tenure, or have more experience in prior M&As, overall experience of these CEOs is higher than for other CEOs. Including these variables would exclude experience-related effects and help to test for the actual effect of retirement.
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