M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Thursday, January 28, 2010

Envious CEOs

Men are so constituted that every one undertakes what he sees another successful in, whether he has aptitude for it or not. - Goethe

Isn't that the truth?!  In their new paper, Do Envious CEOs Cause Merger Waves? in the Review of Financial Studies, Goel and Thakor start with a simple premise: CEOs have preferences that can be characterized by envy.   Assuming CEOs envy each other and that CEOs of larger firms get paid more, then a merger in the industry that increases firm size for one CEO will cause other envious CEOs to be tempted to undertake similar "value-dissipating but size-enhancing acquisitions."  Theirs is another take on the empire-building story.

Abstract: We develop a theory which shows that merger waves can arise even when the shocks that precipitated the initial mergers in the wave are idiosyncratic. The analysis predicts that the earlier acquisitions produce higher bidder returns, involve smaller targets, and result in higher compensation gains for the acquirer's top management team than the later acquisitions in the wave. We find strong empirical support for these predictions. The model also generates additional predictions, some of which remain to be tested.



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