Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

(Hop HipldF0AV) #1

acquisitionstendedtotradeatlowerprice-to-bookratiosthan
otherfirms,andWeir(1997)addedtothisfindingbynoting
that target firms in hostile acquisitions also earned lower
returns on invested capital.
26 Finally,Pinkowitz(2003)foundnoevidencetosupportthe
conventional wisdom that firms with substantial cash
balances were more likely to become targets of hostile
acquisitions.
27 Insummary,then,targetfirmsinhostileacquisitionstend
tobesmaller,tradeatlowermultiplesofbookvalue,andearn
relatively low returns on their investments.
28


WhilemanyCEOchangesareeithervoluntary(retirementor
jobswitching),someCEOsareforcedoutbytheboard. In
recent years,researchers haveexaminedwhenforced CEO
turnover is most likely to occur.



  • Stock price and earnings performance. Forced
    turnoverismorelikelyinfirmsthathaveperformed
    poorly relative to their peer group and to
    expectations.
    29 One manifestation of poor management is
    overpayingonacquisitions,andthereisevidencethat
    CEOs of acquiring firms that pay too much on
    acquisitionsarefarmorelikelyto bereplacedthan
    CEOs who do not do such acquisitions.
    30

  • Structureoftheboard.ForcedCEOchangesaremore
    likely to occur when the board is small,
    31 is composed of outsiders
    32 andwhentheCEOisnotalsothechairmanofthe
    board of directors.

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