Acquisition Decisions and CEO Turnover: Do Bad Bidders Get Fired?

This paper investigates whether corporate control mechanisms discipline management who has made value-reducing acquisitions. The link between acquisition decisions and subsequent turnover of chief executive officer (CEO) is empirically examined. Results from event studies show significant differences in the stock market reaction surrounding the acquisition announcement between the sample of acquirers with post-acquisition CEO turnover and those without subsequent CEO turnover. The average cumulative abnormal returns around the acquisition announcement day are significantly negative for those firms that replaced their CEO after an acquisition occurred. Logit regression analyses provide strong evidence of a negative association between the acquiring firm’s abnormal stock market performance due to the acquisition announcement and the probability of disciplinary CEO departure. Those CEOs who have deviated from shareholders ’ value maximization are more likely to be disciplined through internal corporate governance mechanisms. However, CEOs of firms that cancel an acquisition after observing a negative market reaction are less likely to be replaced subsequently