CEO General Ability and the Takeover Market

Abstract

The purpose of this study is to examine the mechanisms behind the higher performance of generalist CEOs in the takeover market compared to their specialist counterparts as measured by the market reactions to the deal announcement. We study three non-inclusive mechanisms that could enhance the performance in the takeover market for the generalist CEOs: target complexity, deal structure, and the CEO’s past merger and acquisitions (M&A) activity. We proxy target complexity by the size of the target firm, the number of segments, and the level of R&D. For the deal structure, we study the effect of tender offer, horizontal acquisition, and the consideration deal offered. We also study the effect of the CEO’s past experience as an acquirer or as a target. We find that the higher CARs for the generalist CEOs are more pronounced when the CEO acquires small, but complex firms, suggesting target selection as an underlying mechanism. We find no evidence that the effect stems from the structure of the deal or the CEO’s past M&A activity. This study adds to the existing literature by examining the mechanisms behind the acquisition gains for generalist CEOs. The evidence suggests that the increased pay for generalist CEOs is partially justified by their performance in the takeover market.