An Analysis of the Drivers of Acquisition Premiums and Success: A Reinvestigation of CEO Hubris

Abstract

This paper studies the factors that drive up the premiums paid for acquisitions as well as the factors that lead to short-term and long-term success for the acquirer. Past studies have often indicted CEOs for acting selfishly, hubristically, and contrary to the interest of shareholders. Their actions have been shown to increase premiums paid as well as diminish the overall success of the transactions in which they take part. This paper contends, however, that while the presence of competing bidders will drive up the premium paid, it is not via the hubris of the CEO or lack of vigilance of the acquirer’s board. In fact, this study finds that relatively highly-compensated CEOs pay significantly less in the presence of competition. Additionally, this study does not find hubris to affect the subsequent success of an acquisition in the long-term. Short-term gains are found to be significantly higher when the CEO is also the chairman of the board and when the outside directors’ shareholdings are small. This indicates that the market is rewarding the decisions made by insiders and that it trusts higher premiums being paid when an authoritative and powerful CEO is in charge. This study’s results also find that the market may very well be efficient, as the strongest models for one-year gains under AIC testing found no variable to significantly alter cumulative abnormal returns. This result is contentious, however, as some models found higher premiums and cross-border transactions to significantly lower one-year gains.