MOTIVES FOR PARTIAL ACQUISITION: EVIDENCE FROM THE EFFECTS OF CEO CHANGE ON THE PERFORMANCE OF PARTIALLY ACQUIRED U.S. TARGET FIRMS

Download This Article

Abstract

A company may acquire shares in another corporation to discipline the target management and improve target performance, or to gain inter-corporate perquisites such as higher dividends and favorable business deals to the detriment of the other shareholders of the target firm. We investigate the change in the post-acquisition share and operating performance, the dividend policy, the liquidity, and growth prospects of U.S. firms whose shares were partially acquired by other corporations during 1995-2000, wherein the target firms remained independent publicly traded companies following the acquisition. Using a change in CEO post acquisition as a proxy for the extent to which the acquirer wishes to change the direction of the target management, we find that target firms where the CEO was retained show negative risk adjusted abnormal share returns and significant deterioration in operating performance after the acquisition while having a substantial increase in CEO compensation compared to those target firms that replace their CEO during the post acquisition period. This suggests that disciplinary motives may predominate where the acquisition leads to a change in CEO, while obtaining inter-corporate perquisites may be the motivation in acquisitions that do not lead to replacement of the target firm CEO. We do not find support for financial perquisites such as higher dividends that are subject to inter-corporate exclusion.

Keywords: Partial Acquisition, CEO Turnover, Control, Performance, Cash Flow

How to cite this paper: Torabzadeh, K., & Dube, S. (2007). Motives for partial acquisition: Evidence from the effects of CEO change on the performance of partially acquired U.S. target firms. Corporate Ownership & Control, 4(4), 115-139. https://doi.org/10.22495/cocv4i4p9