CEO Underperformance, Risk-Taking, and Shareholder Wealth Effects of Mergers and Acquisitions

This study explores the investment behavior of underperforming chief executive officers (CEOs) on merger frequency and the effect on acquirers’ shareholder wealth of merger bids in U.S. industrial firms. We find that underperforming CEOs are more likely to make acquisitions, especially underperforming CEOs with high equity incentives. For acquirer shareholder wealth, we find that there is no evidence to indicate that underperforming CEOs perform more poorly with a merger bid. Further, we find that rankings of underperforming CEOs who engage in acquisitions are significantly improved after mergers. The improvement effect is stronger for underperforming CEOs with adopting mergers than for those without adopting mergers