Corporate-acquisition activity has been in the doldrums, and the finger of blame has tended to be pointed at investors. In the prevailing view, CEOs are typically empire builders, willing and able to buy, but shareholders have lately lacked the requisite “animal spirits,” a contrast said to have been vividly on display recently in the collapse of Prudential’s bid to buy AIA.
New research by Cynthia Devers suggests that CEOs are more likely to exercise stock options and sell company stock following acquisitions.
But now new research led by the Freeman School’s Cynthia Devers suggests that CEOs may not be the fervent believers in acquisitions that the conventional wisdom suggests they are. For a group that supposedly has a fire to acquire, CEOs are apparently less than eager to leave their own money at risk once their deals are announced, according to a report to be presented at the annual meeting of the Academy of Management (Montreal, Aug. 7-10).
The study of more than 2,000 companies over a period of 12 years finds that CEOs are 28 percent more likely to exercise stock options and 24 percent more likely to sell company stock within three months following acquisition announcements than they are at times in which no acquisitions are announced.
“Although executives exercise options and sell shares for all sorts of reasons, it does seem odd that they’re especially likely to do so in the aftermath of acquisitions that they presumably engineer for the future good of the company,” says Devers, an associate professor of management at the Freeman School, who carried out the research with Gerry McNamara of Michigan State University, Michele E. Yoder of the University of Wisconsin, Madison and Jerayr Haleblian of the University of California, Riverside.
In the words of the study, “Our findings show that in the quarters following acquisition announcements, CEOs reduced their equity-based holdings by cashing out stock options and selling firm stock…presumably to reduce the exposure of their equity-based holdings to potential firm stock price decreases. Thus, their behavior is inconsistent with the idea that CEOs are confident that their acquisitions will generate substantial long-term shareholder value.”