Acquisition premiums, CEO power, and the financial crisis

Abstract

What happens to acquisition price premiums when a powerful bidder CEO confronts a powerful CEO of the target firm? We examine the effect of relative power relationships between the CEOs of the bidder and target firms to explain acquisition overpayment. Our results point to separate sources of power for the acquirer and target CEOs that affect premiums. Acquirer CEOs use power derived from their social networks to improve their ability to judge post-crisis acquisition quality, streamline board decision-making, and reduce premiums. However, target CEOs use only their hierarchical power to reinforce their negotiation stance, driving premiums higher.