May

17

Here is an interesting article on the age of chief executives versus chances of acquisition. It shows that older CEO's are more likely to accept deals and also lower premiums. It's part and parcel of my investigation of how romantic urges of older CEO's often lead to hurtful results for stockholders from the Midwest to the coaches.

Rocky Humbert writes:

Interesting paper. But if I understand their methodology, they note that the chances of a bid is about 5.5% for geezers over 65, and under 4% for the younger CEO's. But their study seemingly only looked at the CEO's of companies that received takeover bids. They didn't look at companies which did NOT receive takeover bids. Hence, the subset that they analyzed has an obvious bias…. and it's possible that the stock of a company w/ an old geezer CEO of a company (which doesn't get a bid) has generated better long term performance than the stock of a company with a younger CEO. Surely there must be a paper out there which regresses CEO age versus stock price performance (over time). Doctor Z — have you seen such a study?

Victor Niederhoffer writes:

How could they come up with the chances of a bid without the total sample? Even an academic other than Sornette or the derivatives expert wouldn't make that mistake.

Rocky Humbert replies:

I didn't read the paper cover to cover, but section 3.1.2. and 3.1.2 defines their sample. Their study ONLY used the SDC US Merger and Acquisition Database….and CEO's who fell into that database.

The results are still interesting– but they would be much more interesting if they had looked at the bigger question. 

Kim Zussman adds:

Here are some somewhat relevant papers from SSRN:

This paper examines the influence of CEO career horizon on the future performance of firms. Specifically, we argue that CEOs with shorter career horizons (as measured by their age) will adopt risk-averse strategies that will, on average, adversely influence future firm performance. Further, we argue that at relatively high levels of CEO ownership control, this relationship is exacerbated. Using a sample of US-based firms from the S&P 500, we find that future financial and market performance are significantly lower for firms with older CEOs but only when those CEOs have strong ownership positions. We conclude by discussing the implications of CEO career horizons in the content of various levels of CEO ownership power.

The announcement of a forced CEO resignation is hailed favourably by the market with a small but significantly positive abnormal return of 0.5%. The market may have anticipated the forced turnover since the abnormal return over a one-month period prior to the turnover amounts to 6%. Whereas voluntary resignations do not cause a price reactions, age-related turnover triggers a small negative price reaction.

While individually age and tenure are only weakly correlated with the stock price reaction to a sudden death, the reaction is strongly positive (5 to 7%) if (1) the executive's tenure exceeds ten years and (2) abnormal stock returns over the last three years are negative. In a number of cases, part of the reason for the positive stock reaction to sudden executive deaths is apparently because in the stockholders' view, an obstacle to a takeover has been removed.

In this paper we examine the cross-sectional determinants of idiosyncratic volatility of biotech IPO firms. We extend current research in two directions. First, we test whether CEO stock options impact on idiosyncratic volatility. Second, we test new hypotheses that relate some easily identifiable managerial characteristics to idiosyncratic volatility. We find that the CEO stock options, resource dependence capabilities, and the age of board members help predict idiosyncratic volatility

A dailyspec classic: 

This paper shows that the time of year of a person's birth is an important factor in the likelihood they become a CEO, and conditional on becoming a CEO, on the performance of the firms they manage. Based on a sample of 321 CEOs of S&P 500 companies from 1992 to 2006 we find that (1) the number of CEOs born in the summer is disproportionately small, and (2) firms with CEOs born in the summer have higher market valuation than firms headed by non-summer-born CEOs. Furthermore, an investment strategy that bought firms with CEOs born in the summer and sold firms with CEOs born in other seasons would have earned an abnormal return of 8.32 percent per year during the sample period. Our evidence is consistent with the so-called "relative-age effect" due to school admissions grouping together children with age differences up to one year, with summer-born children being younger than their non-summer-born classmates. The relative-age effect has been demonstrated in numerous sporting and other contexts to last to adulthood and to favor older children within a school grade. Those younger children who nevertheless succeed by overcoming their disadvantage have to be particularly capable within their cohort. Together, the advantage enjoyed by older children and the particularly high capability of successful young children explain the statistically and economically significant findings. 

And just a few more: 

Regardless of retention , shareholders of acquired firms whose CEO is at retirement age receive lower premiums than shareholders of acquired firms with younger CEOs. This lower premium seems to be explained by the apparent reduced acquisition value of firms led by retirement age CEOs rather than by the target CEO conflict of interest.

Using U.S. plant-level data for firms across a broad spectrum of industries, we compare how career concerns affect the real investment decisions of younger and older CEOs. In contrast to prior research which has examined some specialized labor markets, we find that younger CEOs undertake more active, bolder investment activities, consistent with an attempt on their part to signal confidence and superior abilities. They are more likely to enter new lines of business, as well as exit other existing businesses. They prefer growth through acquisitions, while older CEOs prefer to build new plants. This busier investment style of the younger CEOs appears to be relatively successful since younger CEOs are associated with higher plant-level efficiency compared to older CEOs. 


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