CEO Preferences and Acquisitions

This paper explores the impact of target CEOs’ retirement preferences on 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.

CEO Preferences and Acquisitions

This paper explores the impact of target CEOs’ retirement preferences on 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.mergers & acquisitions, CEO preferences, principal-agent problems

Performance-induced CEO turnover

This paper revisits the relationship between firm performance and CEO turnover. We drop the distinction between forced and voluntary turnovers and introduce the concept of performance-induced turnover, defined as turnover that would not have occurred had performance been "good". We document a close link between performance and CEO turnover and estimate that between 38% and 55% of all turnovers are performance induced, with an even higher percentage early in tenure. This is significantly more than the number of forced turnovers identified in prior studies. We contrast the empirical properties of performance-induced turnovers with the predictions of Bayesian learning models of CEO turnover. Learning by boards about CEO ability appears to be slow, and boards act as if CEO ability (or match quality) was subject to frequent and sizeable shocks

Risk, Reputation, and the Price Support of IPOs

Immediately following public offerings, underwriters often repurchase shares of poorly performing IPOs in an apparent attempt to stabilize the price. Using proprietary Nasdaq data for a large sample of IPOs, I study the price effects and cross-sectional determinants of price support. Some of the key findings are: (1) Price stabilization is substantial, inducing significant price rigidity at and below the offer price. Stabilization appears, at least in the short run, to raise the equilibrium stock price. (2) Many studies suggest that stabilization helps to mitigate information asymmetry problems in the IPO market. I find no evidence that stocks with larger ex-ante information asymmetries are stabilized more strongly. (3) The characteristics of the lead underwriter emerge as the strongest determinants of price support. Larger and more reputable investment banks stabilize more, perhaps to protect their reputations with investors. But there are substantial differences in price support even among the largest underwriters (after controlling for IPO characteristics and underwriter size). (4) Investment banks with retail brokerage operations stabilize much more than other large investment banks. This puzzling result seems inconsistent with the common view that stabilization benefits primarily institutional investors, and I outline and examine several alternative explanatio

Initial Public Offerings and the Firm Location

The firm geographic location matters in IPOs because investors have a strong preference for newly issued local stocks and provide abnormal demand in local offerings. Using equity holdings data for more than 53,000 households, we show the probability to participate to the stock market and the proportion of the equity wealth is abnormally increasing with the volume of the IPOs inside the investor region. Upon nearly the universe of the 167,515 going public and private domestic manufacturing firms, we provide consistent evidence that the isolated private firms have higher probability to go public, larger IPO underpricing cross-sectional average and volatility, and less pronounced long-run under-performance. Similar but opposite evidence holds for the local concentration of the investor wealth. These effects are economically relevant and robust to local delistings, IPO market timing, agglomeration economies, firm location endogeneity, self-selection bias, and information asymmetries, among others. Findings suggest IPO waves have a strong geographic component, highlight that underwriters significantly under-estimate the local demand component thus leaving unexpected money on the table, and support state-contingent but constant investor propensity for risk

Financing Decisions When Managers Are Risk Averse

This paper studies the impact of financing decisions on risk-averse managers. Leverage raises stock volatility, driving a wedge between the cost of debt to shareholders and the cost to undiversified, risk-averse managers. I quantify these "volatility costs" of debt and examine their impact on financing decisions. The paper finds: (1) the volatility costs of debt can be large, particularly if the CEO owns in-the-money options; (2) higher option ownership tends to increase, not decrease, the volatility costs of debt; (3) a stock price increase typically reduces managerial preference for leverage, consistent with prior evidence on security issues. Empirically, I estimate the volatility costs of debt for a large sample of U.S. firms and test whether these costs affect financing decisions. I find evidence that volatility costs affect both the level of and short-term changes in debt. Further, a probit model of security issues suggests that managerial preferences help explain a firm's choice between debt and equit