The Academy of Management Journal just published a new study conducted by academics from Michigan State University, University of Georgia and the University of Michigan-Dearborn. The study is quite a mouthful – “Do They Walk the Talk or Just Talk the Talk? Gauging Acquiring CEO and Director Confidence in the Value-Creation Potential of Announced Acquisitions.” HBR covered the study in a recent article.
The research involved analyzing 2000 public firms over a 12-year period.
Conclusions worth noting
- CEOs are 28% more likely to exercise stock options and 23.5% more likely to sell company stock in quarters following acquisition announcements than after quarters without such an announcement.
- A sharply positive market response over the six-day period surrounding announcements increases the likelihood of CEO option exercises by 17.4% and of CEO stock sales by 15%.
- Boards are 16.7% more likely to issue CEO new stock options following acquisitions than they would otherwise.
Observations Noted By the Authors
- Bursts the myth that acquisitions are ego driven deals where CEOs are over optimistic about their ability to achieve a return? Maybe, certainly if that was true, would we expect an increased probability of stock sales?
- Another assumption in the marketplace is that acquisitions are driven by personal greed. CEOs see the chance of creating a much larger business to manage and that usually justifies a larger salary. But then why would you sell your stock at a time when your package might increase?
- Most acquirers are weak on acquisition process. Their post acquisition planning and integration is just not fit for purpose
- Most CEOs have done few many acquisitions but know strategically it makes sense. The selling of stock is a hedging bet to secure some wealth, before their lack of execution experience is revealed. Boards seem to issue more stock anyway according to the study. (17% more likely to do so after a deal.)
- Perhaps shareholders should demand that CEOs are banned from selling stock for 12 months after a major deal as a condition of getting their approval.