CEO Turnover After Acquisitions: Do Bad Bidders Get Fired?

Abstract

Previous research has documented that the external control market disciplines managers who make value-reducing acquisitions. This paper finds that internal control mechanisms also discipline managers who make value-destroying acquisitions. We find a strong inverse relation between the returns to acquiring firms and the likelihood that their CEOs are subsequently fired. No significant relation exists between the probability that “bad bidders ” get fired and various corporate governance characteristics, including the size and structure of boards. The results indicate that internal governance mechanisms discipline managers who stray from value-maximization. It also suggests that firms “choose ” these mechanisms optimally such that no empirical relation exists between governance structure and the probability that bad bidders are fired. Classification code: G34.

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