Aaltodoc publication archive (Aalto University institutional repository)
School of Business | Department of Finance | Finance | 2015
Thesis number: 14316
CEO age effect on M&A propensity - Evidence from the US
|Title:||CEO age effect on M&A propensity - Evidence from the US|
|Year:||2015 Language: eng|
|Department:||Department of Finance|
|Index terms:||rahoitus; financing; yrityskaupat; corporate acquisitions; johtajat; managers; ikä; age|
|Key terms:||Mergers and acquisitions; M&A propensity; managerial traits; CEO age|
CEO as the most senior executive carries vast responsibility of the company's operations and decision making, including decisions on M&A transactions. Thus, various CEO traits may influence the corporate decision making, as also prior literature suggests. This research focuses on studying the effect of CEO age on M&A propensity. Younger CEOs can be hypothesized to be more prone to M&A transactions, as their personal compensation gain is bigger than the compensation gain for older CEOs, as Yim (2013) explains her results that show the pioneering effect of the acquisitiveness of youth. I add to Yim's (2013) findings by studying the effect with a data set compiled from a longer time period and moreover, by studying the differences in the CEO age effect across industries and different market circumstances. Differences are anticipated to be found due to young CEOs' quicker adaptability to changed market conditions and pursue for personal compensation gains in the more favorable M&A circumstances. The data is extracted from various sources. The final data set consist of 2617 unique firm-year observations of US headquartered companies within the 20-year time frame of 1993-2012. This sample includes 144 companies, 474 CEOs and 716 M&A transactions. The data set is used in a number of regression models, yet the logistic models being the primary method for investigating the CEO age effect. The dependent variable in this research is a binary variable indicating if the company and CEO have acquired at least one other firm during the respective observation year or not. The CEO age effect is studied by observing age as a count variable, in sextiles, and in interaction with industry dummies and year dummies to compare if the magnitude of the effect varies in divergent circumstances. I find a decrease in M&A propensity for ageing CEOs until the age of 62. The likelihood for an acquisition in a particular year reaches 40% for 36-year-old CEOs and declines to 17% for the least acquisitive 62-year-old executives. This 26-year increase in age represents a 58% decrease in M&A propensity. Surprisingly however, I find that after passing the age of 62 M&A propensity starts to increase, and a further 18-year increase in CEO age increases the M&A propensity with a marginal effect of 59%, as an 80-year old CEO has an M&A propensity estimate of 27%. Thus, young CEOs are shown to be more prone to pursuing acquisitions, maybe due to the larger personal compensation gains, as expected. The novel finding of the increased M&A propensity of old CEOs can be explained by the approaching retirement causing executives to pursue one last compensation gain and monument building. I find no evidence for CEOs exploiting more favorable market circumstances. The effect of CEO age is not shown to vary across industries, and furthermore I find no support for an emphasized age effect during more favorable times when the M&A market is considered to be hot.
Master's theses are stored at Learning Centre in Otaniemi.