Good Signal or Bad Signal? Impact of CEO Fame on Takeover Outcomes

Abstract

This paper identifies a novel signaling mechanism in M&A events. Using a newly hand-collected data set on famous CEOs from 2013 to 2017, we find that a famous acquiring CEO sends a bad signal on the announcement date of M&A. Such CEOs are prone to overconfidence in their abilities, leading to overpayment for targets and excessive goodwill. The market reaction to this negative signal is a lower cumulative abnormal return (CAR). Moreover, the post-acquisition operational performance often fails to justify the goodwill, resulting in significant impairment losses. In contrast, a famous target CEO conveys a good signal. These CEOs are better at enhancing the target’s fair value with solid, justifiable goodwill. The market’s response to this positive signal is a relatively higher abnormal return, creating higher value for shareholders. Additionally, the acquisition’s synergy is more sustainable and less likely to result in goodwill impairment losses. Our research highlights the distinct roles of acquiring and target CEO fame in M&A transactions, particularly in environments characterized by asymmetric information.