Dutch people might still remember the 1992 statement of Jürgen Schrempp of then DASA (later DaimlerChrysler) acquiring the Dutch aircraft company Fokker saying: “Fokker is my love baby”.
It turns out CEO’s, typically, are very confident when announcing acquisitions. This, in spite of the also very typical pattern of poor post-acquirer performance. The question, then, is this: Do CEO’s really believe in the performance-statistics-defiance of “their” acquisitions (good faith) or are they perhaps acting that this would be the case (good acting)?
Isn’t it great there are researchers daring to ask (and answer) these types of questions?
Devers and others were indeed wondering whether CEOs act as though they are confident in the acquisition’s value-enhancing potential.
They created hypotheses based on two perspectives:
- the value enhancing perspective (CEOs have access to private synergy opportunities, superior information, etc.)
- the private interest perspective (CEO’s desire to increase their compensation, power, etc.)
IF CEO’s are confident in the long-term shareholder value potential of an acquisition, they will “walk the talk” and hold their stock options and stock following the acquisition announcements to benefit from the share price appreciation.
IF CEO’s have low confidence in the long-term shareholder value potential of an acquisition, they will “talk the talk” and exercise their stock options and sell firm stock following the acquisition announcements to mitigate of potential share price decline.
Results: Over a 12-year period, CEO’s were 28% more likely to “talk the talk” through exercising stock options and 24% to sell firm stock.
Are CEO statements at acquisitions made in good faith or is it good acting? The latter is more often the case.
For more information about this phenomenon, read the article.