After controlling for firm, CEO, and deal specifics, the researchers found that the takeover premium is 8 to 10 percentage points lower, on average, when the targeted firm is run by a retirement-age CEO. Similarly, the gain in a targeted firm’s stock price on the day after a takeover announcement is on average 10 percentage points lower for companies run by retirement-age CEOs.
One possible explanation, the authors say, is that outside investors might view takeovers of firms as more likely when they are helmed by retirement-age CEOs, an assessment that could drive up valuations ahead of the bid. But another reason, they argue, is that target CEOs who are ready to step away might not haggle as forcefully over a deal and as a result might capture fewer benefits for their firms.
Several implications emerge. The authors recommend that boards be sensitive to the influence that a CEO’s age may play on merger and takeover decisions. In particular, boards could adjust the terms of CEO compensation contracts, especially golden parachutes, to take into account career concerns that change with age.
If those concerns “cause younger CEOs to be too reluctant to sell their firms, then boards can mitigate this problem through explicit monetary incentives,” the authors write. But when CEOs reach retirement age and career concerns lessen, the parachutes may have to be trimmed in size and restricted in scope. Otherwise, they could themselves serve as incentives to spur the wrong kind of deal.
CEOs may be reluctant to see their firms sold in a merger or acquisition deal because of the impact on their career prospects and future earnings. But reaching retirement age mitigates this factor and reduces CEO resistance to takeover bids, with the result that shareholders often gain less from the deals.