The likelihood a for-profit company will receive a takeover bid is sharply higher when the target CEO is near age 65, according to new academic research.
Researchers from Stanford (Calif.) University and Dartmouth College in Hanover, N.H., wrote a paper about their findings, which provide "evidence that the career concerns and retirement preferences of target firms' CEOs affect takeover decisions." Moreover, those decisions may lead to outcomes that are unlikely to be in the target shareholders' best interest.
The researchers examined characteristics of CEOs and companies from the 1997-1999 merger wave. If the company was led by a CEO under retirement age, there was an annual probability of 4.4 percent that the company would receive a successful takeover bid. But when the CEO was 64-66 years in age, that probability increased to 5.8 percent. "This corresponds to a 32 percent increase in the odds of a sale," the researchers wrote.
These results suggest bidders are more likely to target companies that are led by a CEO near retirement age, perhaps due to the CEOs' greater willingness to accept a takeover bid. But the effect of age on takeover frequencies is "significantly weaker among better governed firms," according to the paper, which measured "good governance" as stock ownership by the CEO, by blockholders and by directors, board size, board independence and CEO-chairman duality.
"This paper has a number of broader implications," wrote the researchers. "A growing literature in corporate finance examines the effects of executives' personal attributes — including risk aversion, overconfidence, or life experience — on corporate finance decisions. Our paper extends this literature with evidence that CEOs' desire to retire at age 65, which likely arises from a custom or social norm, has a significant and systematic effect on the decision whether (and when) to sell a public firm."
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