Windfall gains, loss aversion, and the price of a deal: Target CEO equity risk-bearing and acquisition premiums
Larger windfall gains lower target CEOs' willingness to push for higher premiums, moderated by prospect type.
Summary
The study analyses 435 completed US acquisitions between 1994 and 2020 through behavioural agency theory. When an acquisition bid lifts a target CEO's personal equity wealth sharply, the CEO becomes more loss-averse and pushes less for a higher price, so larger windfall gains are associated with smaller increases in the final premium, as the CEO prioritises completing the deal over maximising its value. Two things change the pattern: strong growth in the target's revenue encourages tougher bargaining, while an expected role for the CEO after the merger amplifies the loss aversion. The authors conclude that target CEO negotiating behaviour follows predictably from equity compensation and prospects, and is not random variation in deal terms.
Editor's opinion
A target CEO who has just made a large gain on their equity has more to lose than to win from a prolonged negotiation, and negotiates the price accordingly. Boards of targets should look at how the CEO's pay is structured before the deal, and acquirers can read the CEO's windfall and retention prospects as a signal of how hard the price will be pushed.
Key concepts
target CEO · acquisition premium · loss aversion · windfall gains