ISKANDAR SHEKHAR 20 Do insider CFOs deliver better acquisition performance JBR

Journal of Business Research 118 (2020) 240–252
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Journal of Business Research
journal homepage: www.elsevier.com/locate/jbusres
Do insider CFOs deliver better acquisition performance?
Mai Iskandar-Datta , Shriya Shekhar
⁎
T
Wayne State University, USA
ARTICLE INFO
ABSTRACT
Keywords:
Insider
CFO
Mergers and Acquisitions
Factor Productivity
We document that acquirer firms with insider CFOs achieve superior industry-adjusted operating performance in
the post-acquisition period relative to firms with outsider CFOs, utilizing a sample from 1994 to 2014. Unlike
insider CEOs, we find that insider CFOs do not differ from outsider CFOs in the acquisition deal types they
undertake. However, they achieve significantly higher factor productivity gains after the acquisition. Our analysis suggests that the ability to identify targets that can yield higher synergy gains and the ability to integrate
the target within the firm are behind the superior post-acquisition returns of insider CFOs. Our results are robust
to various time-windows and a range of robustness tests regarding model specification—such as including additional firm level controls, alternative performance measures, and controls for firm overconfidence and CFO
education, overconfidence and pay.
JEL classification:
G30
G34
G40
1. Introduction
The motivation behind corporate acquisition decisions has long
perplexed researchers. Although some acquisitions have strategic motivations, such as new market entry, efficiency, competitive gains, and
knowledge transfer (Moschieri & Campa, 2014), they often fail to meet
their performance objectives and are generally found to destroy value
(Lewis & McKone, 2016). Yet since 1990, merger and acquisition activity (M&A) has rivaled corporate fixed asset investments1 with an
aggregate value in excess of $34 trillion.2 Consequently, there has been
much attention in the literature on corporate acquisition decisions and
the factors responsible for post-acquisition success (Walters, Kroll, &
Wright, 2007; Popli, Ladkani, & Gaur, 2017). While several studies have
investigated acquisition performance based on the transaction structure
and target characteristics (Cai & Sevilir, 2012), more recently the focus
has moved to the influence of executive characteristics, such as age,
gender, hubris, and risk aversion (Ismail, Abdou, & Annis, 2011;
Schmidt, 2015) on the success of acquisitions. Extending this literature,
this study investigates the relationship between the Chief Financial
Officer (CFO) succession type and the post-acquisition operating performance. Researchers find that CFO characteristics are more crucial
than those of Chief Executive Officer (CEO) in some corporate decisions, such as a firm’s investments and the frequency of engaging in
acquisitions, among others (Graham & Harvey, 2001; Bertrand &
Schoar, 2003). Even though research has established the participation
of CFOs in the acquisition process, the influence of CFO attributes on
acquisition performance is not fully understood. The expanding significance of the CFO’s role and the importance of executive characteristics in determining performance renders CFO characteristics a crucial
piece of the puzzle surrounding acquisition success worthy of investigation.
Examining executive succession, the literature has linked CEO decision-making and firm performance (Clutterbuck, 1998) based on insider/outsider CEO succession. More specific to acquisitions, Ferris,
Jayaraman, and Lim (2015) report that insider CEOs make fewer acquisition bids, buy larger targets, and rely less on cash payments vis-àvis outsider CEOs. Given the differences between insider and outsider
CEO decision making, we propose that an examination of variations in
CFO succession (insider or outsider) can provide meaningful insights
about the value created through acquisition activity. Our paper tackles
a pertinent, yet unaddressed, research question: Which type of CFO is
associated with better post acquisition performance? Moreover, we
explore the channels through which insider/outsider CFOs can create
acquisition value by examining the differences in their acquisition deals
and target selection. This investigation is motived by prior studies
which have attributed post-acquisition success to target selection, synergy gains, and operational integration (Haspeslagh & Jemison, 1991).
Utilizing this premise, we derive our next research questions: Do insider
CFOs indulge in different types of acquisition deals compared to outsider CFOs? And, whether insider CFOs are better poised at identifying
Corresponding author at: Mike Ilitch School of Business, Wayne State University, 2771 Woodward Ave, Detroit, MI 48201, USA.
E-mail addresses: [email protected] (M. Iskandar-Datta), [email protected] (S. Shekhar).
1
http://evonomics.com/corporate-mergers-strangle-economy-jordan-brennan/, accessed on March 31, 2019.
2
https://imaa-institute.org/m-and-a-us-united-states/, accessed on March 31, 2019.
⁎
https://doi.org/10.1016/j.jbusres.2020.06.040
Received 20 April 2019; Received in revised form 16 June 2020; Accepted 18 June 2020
Available online 03 July 2020
0148-2963/ © 2020 Elsevier Inc. All rights reserved.
Journal of Business Research 118 (2020) 240–252
M. Iskandar-Datta and S. Shekhar
targets and achieving integration than outsiders.
Our findings offer a number of theoretical and empirical contributions to the literature. First, for 2,319 acquisition-years for US acquirers
and targets, spanning 1994 to 2014, we document that acquirers with
insider CFOs achieve better post-acquisition operating performance,
even after controlling for various firm, CFO, and deal characteristics
found to influence acquisition returns in the literature. Moreover, our
results are maintained after utilizing a range of robustness tests, including different identification strategies, various time-windows, and
alternative measures of operating performance. We find that the superior acquisition performance sustains beyond one year and into the
second year post the acquisition. The results hold even after controlling
for additional CFO attributes, such as CFO overconfidence, CFO education and compensation. Our results extend the literature by identifying the CFO’s insider status as a crucial driver for the acquirer’s postacquisition operating performance, thereby adding to the existing evidence on the impact of CFO power (Sainani & Florackis, 2017) and CFO
gender (Huang & Kisgen, 2013) on acquisitions.
Second, we leverage the existing literature (Dhir, Ongsakul, Ahmed,
& Rajan, 2019; Graham & Harvey, 2001) to present a theoretical framework regarding the influence of executive succession type on postacquisition performance. Drawing upon the resource-based and
knowledge-based views on post-acquisition performance, we identify
and examine the impact of two channels through which insider CFOs
create acquisition value. Given that organizational capabilities and
knowledge integration are significant factors for post-acquisition success (Dhir et al., 2019), we posit that the value derived from organizational capabilities and knowledge integration is higher for internal
CFOs compared to outside appointments. We present evidence that
post-acquisition integration (i.e., execution) is the primary factor behind insider CFOs’ acquisition success, and not deal type or payment
method. The analysis supports the view that insider CFOs due to their
longer association with the firm, (which translates into stronger professional, social, horizontal, and vertical linkages within the firm), are
better able to utilize organizational capabilities and execute post-acquisition integration. Moreover, complementing Bertrand and Schoar
(2003) findings that CEOs with MBA are associated with higher operating returns on assets, we document that CFOs with MBAs exhibit
superior post acquisition performance and productivity gains. Finally,
our results point to significant behavioral differences in acquisitions
between CEOs and CFOs as it relates to overconfidence. Unlike overconfident CEOs (Malmendier & Tate, 2008), overconfident CFOs do not
indulge in value destroying deals.
One key managerial implication from our findings is that firms
pursuing an active acquisition strategy stand to gain by focusing on
their internal leadership succession policies geared toward grooming
and retaining internal talent and building effective leadership transition
processes. Another vital managerial implication of our results is the
potential use of executive compensation as a tool to ensure successful
internal leadership succession. Further, our evidence suggests that CFO
succession type may be a vital input in stock valuation models, especially around acquisitions. Finally, our findings on executive overconfidence and MBA qualification could guide firms to establish a
human resource policy that encourages and promotes employees with
specific attributes that are most amenable for the firm’s acquisition
strategy.
In the next section, we discuss hypotheses development; Section 3
describes the data; Section 4 presents the methodology; Section 5 reports the results and robustness tests; and Section 6 concludes the paper
with a detailed discussion of the implications and limitations of our
findings.
characteristics to acquisition decisions and performance, and on the
importance of CFOs in corporate decision making. Next, we propose
two hypotheses. The first links insider/outsider executive succession
type to firm performance while the second hypothesis centers on the
mechanisms through which post-acquisition value is created.
2.1. Post-acquisition performance
For indications of successful acquisitions, the literature has generally examined abnormal announcement returns as a market-based
measure of short-term benefits while accounting-based measures are
used to quantify long-term benefits from potential market expansion
and gains in competitiveness (Capron, Dussauge, & Mitchell, 1998).
Competitiveness and efficiency gains are typically captured by the
firm’s operating performance. Since positive initial abnormal returns do
not necessarily translate into improved profitability, in this paper, we
focus on measuring the success in acquisition outcome by utilizing
operating performance.
2.2. Influence of executive attributes on post-acquisition performance
The early acquisition literature focused on the relevance of transaction structure and target characteristics to creating value (Walters
et al., 2007; Popli et al., 2017). More recently scholars have begun to
examine the influence of board and executive characteristics, such as
age, gender, hubris, and risk aversion on acquisition performance
(Schmidt, 2015). Researchers have documented the importance of the
board of directors (Field & Mkrtchyan, 2017) and CEO tenure (Walters
et al., 2007), CEO age (Graham, Harvey, & Puri, 2013), experience
(Custódio & Metzger, 2014), education (King, Srivastav, & Williams,
2016) and political orientation (Elnahas & Kim, 2017) to post-acquisition performance. Investigating the mechanisms contributing to acquisition failure, Friedman, Carmeli, Tishler, and Shimizu (2016) argue
that behavioral factors at the individual and organizational levels may
impede rational decision-making during acquisitions.
2.3. Expanding role of CFOs in corporate decisions
Research reveals that CFOs play a critical role in corporate decision
making. For example, Bertrand and Schoar (2003) document that CFO
attributes are more crucial than those of the CEO for certain corporate
decisions — e.g., firm’s investments, number of acquisitions, leverage,
interest coverage, and cash holdings. Other scholars have underscored
the positive influence of the CFO on accounting practices and the effectiveness of value-based management (VBM) — a management approach that focuses on maximum value creation in organizations (Firk,
Schmidt, & Wolff, 2019). With regards to acquisitions, practitioners
have long considered CFOs to be crucial for M&A deal success3 as they
are involved in target selection, ensuring availability of financing,4 in
addition to evaluating the risks and rewards of such transactions.
Confirming these views, academic researchers also show that CFOs bear
crucial acquisition related responsibilities ranging from identifying
targets (Mukherjee, Kiymaz, & Baker, 2004) to designing effective financing strategies (Graham & Harvey, 2001), to ensuring the realization of synergies and successful merger integration (Hommel, Fabich,
Schellenberg, & Firnkorn, 2012). Additionally, Sainani and Florackis
(2017) demonstrate that firms with powerful CFOs exhibit better postacquisition performance while Keck and Tang (2016) find that higher
CFO power leads to lower acquisition premiums and better acquisition
announcement returns but has no impact on their firms’ propensity to
engage in acquisitions.
2. Theoretical background and hypotheses development
3
https://www.strategyand.pwc.com/books/display/cfo-deal-maker.
https://www.financierworldwide.com/role-of-the-cfo-in-ma/#.WojwfZFzm4, accessed on March 31, 2019.
In this section, we begin by reviewing three strands of literature—on post-acquisition performance, on the significance of executive
4
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M. Iskandar-Datta and S. Shekhar
2.4. Hypothesis 1: Executive succession and firm performance
and the target (Healy, Palepu, & Ruback, 1992). The knowledge-based
view proposes that the acquisition outcome is influenced by the acquiring firm’s capability to manage the acquisition process. Scholars
suggest that acquisition performance depends on the acquisition process involving target selection (i.e., deal type) on the one hand, and
managing the post-acquisition transition phase and implementing an
effective integration strategy (i.e., deal execution) on the other hand
(Haspeslagh & Jemison, 1991). The motivation in selecting a target may
have implications for whether a deal creates value or not. For example,
acquisitions driven by managers’ pursuit of empire building are more
likely to lead to value destruction, while acquisitions focused on firm’s
core business to take advantage of efficiencies and synergies and to gain
inimitable competitive advantage could result in better firm outcomes
(Maksimovic, Phillips, & Prabhala, 2011). In line with the above discussion, we investigate the aforementioned two channels associated
with acquisition success—deal type and deal execution. We do this by
first testing if the acquisitions undertaken by insider CFOs differ in
terms of deal types. Following the literature, we examine the following
deal types: whether the target is public or private, the relative deal size,
whether the deal is diversifying or not, and payment method. Second,
we test whether insider CFOs are able to achieve improved integration
post the acquisition after controlling for deal type.
Past firm performance has been identified as one of the drivers for
future succession type, documenting an association between failing
companies and outsider succession (Schwartz & Menon, 1985). Datta
and Guthrie (1994) provide empirical evidence that firms with lower
profits and growth are more likely to have outsider CEO successions. In
firms which have exhibited weaker past performance, outsiders are
preferred because they add value (Schwartz & Menon, 1985; Datta &
Guthrie, 1994) by swiftly undertaking significant strategic changes
compared to insiders (Wiersema, 1992). Studies have also investigated
the factors leading to internal succession. For the position of CEO,
Clutterbuck (1998) cites seamless succession consensus building, and
having the retiring executive serve as a chairperson‐mentor during the
transition period as some of the motivations for internal succession.
Underscoring the importance of firm specific knowledge capital,
Clutterbuck (1998) points out that firms considering potential outsider
CEOs usually prefer that they spend some time in the company to understand how it works.
Regarding post-succession decision making, research points to
benefits of insider over outsider CFOs. For example, prior studies find
that outsider executives face excessive burden and pressure to demonstrate their worthiness in the organization where simply maintaining
the status quo does not suffice (Quigley & Hambrick, 2012). This preoccupation is evident in studies showing that outsider CFOs typically
modify pre-existing financial reporting (Geiger & North, 2006) and
implement significant new practices and new projects (Baxter & Chua,
2008), which can take away the CFO’s focus from post-acquisition integration. Additionally, the organizational learning literature provides
evidence that executives’ firm specific knowledge and experience can
improve post-acquisition performance (Dhir & Mital, 2013), which
renders advantages to insider CFOs. Insider CFOs would thus be better
positioned to command a more efficient integration entailing the utilization of firm’s strategic resources, such as innovation, technological
capabilities, and knowledge (Burrus, Edward Graham, & Jones, 2018).
Another set of studies probe the impact of succession type on future
firm performance. For example, studies find that, in addition to insiders
possessing upfront knowledge about the company’s work culture and
strategies, insiders are more likely to continue with the company for a
longer duration, thereby reducing hiring costs. Additionally, in assessing the performance differences between insider and outsider CEOs,
Clutterbuck (1998) finds that insiders propel greater improvements in
firm value vis-à-vis outsiders. Ferris et al. (2015) establish that firms
with internal CEOs experience higher operating performance and Tobin’s Q, pay more dividends, and spend more on capital expenditures
but less on R&D. In the context of acquisitions, Trichterborn, Zu
Knyphausen-Aufseß, and Schweizer (2016) ascribe acquisition success
to an accumulation of acquisition learnings and know‐how from prior
experience. Investigating alliances, Kale and Singh (2009) discuss the
loss of tacit knowledge during executive turnovers, further stressing the
role of firm specific knowledge capital in an organization’s success.
Given the evidence on insider CEO performance, in a parallel vein we
argue that firms with insider CFOs possessing more firm specific
knowledge should lead to better firm performance post acquisition. The
above discussion leads us to propose the following hypothesis.
2.5.1. Deal types and acquisition performance
Researchers have documented that certain deal types can influence
post acquisition returns (Cai & Sevilir, 2012). For example, cash financed deals are found to outperform stock financed deals, private
targets are received more positively than public targets (Yuce & Ng,
2005), and firms purchasing smaller targets outperform because they
are easier to assimilate than larger deals (Ramaswamy & Waegelein,
2003). Also, acquisitions involving similar business operations create
synergies, reduce financial and operational risks and result in better
post-acquisition performance (Lee, Lee, & Garrett, 2017). Further,
Ferris et al. (2015) show that insider CEOs make fewer acquisition bids,
buy larger targets, and rely less on cash payments than outsider CEOs.
The same may not be true for CFOs. Thus, we examine the differences in
acquisitive behavior between insider and outsider CFOs, in order to
explain differences in post-acquisition outcome.
2.5.2. Integration and acquisition performance
Deal execution, or post-acquisition integration, offers another key
dimension to understand acquisition performance. Zollo and Singh
(2004) argue that firm’s integration capability is a crucial factor affecting acquisition success, where the integration process involves the
level of organizational integration between the acquirer and the target,
and the removal of redundant resources (e.g., management teams,
human capital, distribution channels, and physical assets). Thus, successful integration that disrupts pre-existing resources and routines
could reduce the costs of the combined entity, leading to enhanced
performance (Ocasio, 1997) while allowing the acquirer to realize the
potential acquisition value (Datta & Grant, 1990).
Stressing the significance of factors affecting deal integration, Dhir
et al. (2019) ascribe post-acquisition success to organizational capabilities and knowledge integration, among other factors. Organizational capabilities can have a positive influence on post-acquisition
integration by reducing knowledge gaps, improving a firm’s adaptiveness, competitiveness, and performance (Jiménez-Jiménez & SanzValle, 2011). We discuss two aspects of organizational capabilities,
namely, organizational learnings and firm’s knowledge base. Organizational learnings contribute to post-acquisition success by utilizing
inferences from past experiences (Barkema & Schijven, 2008), aiding in
target identification, prioritization of business activities (He & Zhang,
2018), and allowing detection and correction of business strategy errors
(Shipton, Fay, West, Patterson, & Birdi, 2005). Insider CFOs’ intimate
knowledge of the various actors and processes within the firm yield an
advantage over outsider CFOs in terms of internal coordination of
Hypothesis 1.. Firms with insider CFOs experience better post acquisition
operating performance compared to those with outsider CFOs.
2.5. Mechanisms for acquisition value creation
We identify two broad channels that can impact post-acquisition
performance – deal type and deal execution, which draw on two wellestablished theories, namely, the resource-based view and the knowledge-based view. The resource-based view (Barney, 1991) attributes
acquisition performance to resource relatedness between the acquirer
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Journal of Business Research 118 (2020) 240–252
M. Iskandar-Datta and S. Shekhar
literature (Ahern & Harford, 2014), we exclude acquisitions with
transaction value less than $1 million, negative target assets, and
transaction value less than 1 percent of the acquirer’s market value four
weeks prior to the deal. We include only those transactions where the
post-acquisition ownership of the acquirer is greater than 50 percent
(Officer, 2007). Further, winsorizing all variables at 1% and 99% levels
ensures that the results are not driven by outliers. After applying the
above filters, our final dataset is comprised of 2,319 acquisition-year
records. The observations vary in different models depending on
availability of variables in different specifications.
learnings for integration success. Insider CFOs can also facilitate
smoother integration by employing knowledge base to achieve knowledge transfer and assimilation of target firm's knowledge base and experience (Xie, Zou, & Qi, 2018). Knowledge base can positively influence integration success through knowledge identification, creation and
accumulation spanning firm's vision, (Argote & Miron-Spektor, 2011)
and experience accumulation, competitive advantage, and market
adaptability (Kogut & Zander, 1992). Thus, insider CFOs by virtue of
their longer association with the firm combined with their firm-specific
knowledge, have an advantage over outsider CFOs in utilizing a firm’s
knowledge base for integration success.
In contrast, outsider CFOs face challenges in achieving a superior
firm performance. Firk et al. (2019) argue that outsider CFOs, preoccupied with their own projects and operating under greater performance pressure tend to neglect VBM, and underperform. Thus, we
conjecture that outsider CFOs face a more difficult task at integration
due to lack of familiarity with the company’s internal operations and
due to higher pre-occupation with their own projects.
In addition, knowledge integration and knowledge transfer from
acquisitions can also improve integration outcomes especially by
helping firms tackle culturally and socially diverse working environments (Moschieri & Campa, 2014), aiding efficiency and competitiveness (Andersson, Forsgren, & Holm, 2001), enhancing problem solving
(Zahra & George, 2002), and innovativeness, which contribute to
overall performance (Tseng, 2010). Since insider CFOs have spent more
time at the firm, they have an edge over outsider CFOs in terms of
collective knowledge within the firm needed for successful integration.
Based on the above discussion, we propose the following hypothesis.
4. Methodology
To examine the relationship between CFO status and acquirer’s
operating performance, we use the following multivariate regression
model.
Perfi, t + 1 =
0
+
1
Insideri +
2 3
(CFO Controls )i +
(Acquirer Firm Controls )i, t
(Deal Controls )i, t +
i, t + 1
1
+
4 7
8 11
(1)
4.1. Dependent variable
Measures of acquisition success could include access to new markets, increased resource availability, profitability improvements and
efficiency gains through technological and competitive advancements.
In this paper, we employ profitability and efficiency gains as the performance proxies. Perfi,t+1, the dependent variable in Equation (1), is
measured as the industry-adjusted ratio of earnings before interest, tax,
depreciation and amortization (EBITDA) to book value of assets (Ferris
et al., 2015; Field & Mkrtchyan, 2017), where, i represents the combined firm post acquisition, and t represents the year of acquisition. For
industry adjustments, we utilize the 2-digit SIC industry median. For
robustness, we also assess the acquirer’s industry-adjusted operating
performance two years post acquisition (Perfi,t+2).
Hypothesis 2.. Acquisitions made by insider CFOs experience better post
acquisition factor productivity gains than those made by outsider CFOs.
We summarize the theoretical framework discussed above in Fig. 1
which depicts the link between CFO succession type and acquisition
performance through the identified channels of acquisition value
creation i.e. deal type and target integration.
3. Data
4.2. Test variable
Our sample comprises of acquisitions of US targets made by US
acquirers during the period 1994 to 2014 obtained from SDC Platinum’s
Mergers and Acquisitions database. The information on firm characteristics is gathered from Compustat. Executive compensation, succession, age, and gender are obtained from the ExecuComp database.
Missing data in ExecuComp on CFO succession (insider/outsider) and
CFO age is supplemented through hand collection from public sources
through web searches. We also hand collect information on CFO education. To keep observations with extreme values from skewing results,
we include only those firm-years where the acquirer’s equity is positive,
and firm’s sales and assets are above $1 million. In line with the
Our test variable, Insider, represents CFOs who were appointed from
within the firm. Following prior literature, a CFO is considered an
outsider if the executive has been at the firm for six months or less.
Insider, a dummy variable, takes a value of 1 if the CFO in the firm is an
insider.
4.3. Control variables
Given the potential influence of gender (Huang & Kisgen, 2013) and
age (Graham et al., 2013) on executive behavior and decisions, we
Fig. 1. Theoretical model.
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M. Iskandar-Datta and S. Shekhar
Table 1
Descriptive statistics. The table presents the summary characteristics for the sample. All variables are winsorized at the 1st and 99th percentiles. Variables are defined
in Table 1.A. ***, ** and * indicate statistical significance at 1%, 5% and 10% levels, respectively.
Panel A. Insiders and outsiders – Acquirer characteristics
Outsider
Asset ($ Bn)
MTB
R&D
SG&A
Capex
Profitability
Insider
Mean
Median
SD
N
Mean
Median
SD
N
Mean difference
8.755
2.171
0.060
0.252
0.049
0.087
1.362
1.574
0.035
0.211
0.034
0.083
25.625
2.342
0.071
0.196
0.054
0.101
1187
1087
722
1026
1162
1186
10.641
1.983
0.048
0.238
0.054
0.085
2.318
1.549
0.025
0.181
0.041
0.084
25.501
1.380
0.069
0.226
0.054
0.110
778
702
448
632
762
776
−1.886
0.188*
0.012***
0.014
−0.005**
0.003
Panel B. Insiders and outsiders – Deal characteristics and post-acquisition performance
Outsider
Perft+1
Perft+2
Prodt-1,t+1
Prodt-1,t+2
Cash_Only
Pub_Tgt
Rel_Size
Diversifying
Insider
Mean
Median
SD
N
Mean
Median
SD
N
Mean difference
0.028
0.027
−0.006
−0.022
0.371
0.164
0.044
0.442
0.019
0.018
−0.009
−0.022
0.000
0.000
0.006
0.000
0.090
0.088
0.222
0.246
0.483
0.370
0.106
0.497
8523
8173
8117
7780
3714
3714
3157
3714
0.037
0.037
−0.011
−0.028
0.365
0.194
0.039
0.458
0.026
0.026
−0.012
−0.027
0.000
0.000
0.005
0.000
0.080
0.078
0.212
0.219
0.481
0.396
0.109
0.498
6641
6424
6376
6162
2894
2894
2439
2894
−0.010***
−0.010***
0.005
0.006
0.006
−0.031***
0.005*
−0.016
pairwise correlation coefficients between the controls and the dependent variable, displayed in Table 2, show that the correlations among
the variables are not very high.
include these two variables as controls, where Female is a dummy
variable that takes a value of 1 if the CFO is a female.
We also include the standard firm control variables used in the M&A
literature, such as firm size calculated as the natural logarithm of total
book assets (Size), market-to-book ratio (MTB) measured as the market
value of assets to book assets, where market value of assets is the book
value of assets minus the book equity plus the market value of equity,
and Leverage which is computed as long-term debt to total book assets.
Controlling for the above firm characteristics also addresses the concern
that insider succession may be dependent on firm type, thus allowing us
to isolate the effect of insider status on firm performance. Further, to
control for the possibility that insider succession is more likely in successful firms (Schwartz & Menon, 1985), we include in our regression
models lagged operating performance (Profitability, calculated as
EBITDA scaled by book assets).
We include acquisition deal related variables which have found to
influence acquisition returns, namely, the payment method, whether
the target is public or private, the relative deal size, and whether the
deal is diversifying or not (Cai & Sevilir, 2012). The dummy variable
Cash_Only takes a value of 1 if the deal is paid entirely by cash, and 0
otherwise. Pub_Tgt takes a value of 1 if the target is a publicly listed
firm, and 0 otherwise. Relative deal size, Rel_Size, is calculated as the
value of transaction to the acquirer’s market value of assets. The variable Diversifying takes a value of 1 if the 2-digit SIC code of the acquirer
differs from the target, and 0 otherwise.
5.2. Post-acquisition operating performance
Table 3 presents regression results for Eq. (1) for one- and two-year
post-acquisition operating performance. Model 1 shows that acquirers
with insider CFOs experience positive and significant industry-adjusted
one-year acquisition returns.5 The superior acquisition returns for insider CFOs continue in Model 2 where CFO and firm level control
variables are added, and in Model 3 which augments the model further
by including deal control variables. Similarly, Models 4, 5 and 6, which
examine the two-year post-acquisition operating performance, confirm
that firms with insider CFOs significantly outperform firms with outsider CFOs. The evidence in this table supports Hypothesis 1.
The coefficients for the other control variables are in line with the
literature. The results indicate that low growth and more profitable
acquirer firms achieve better post-acquisition returns. Regarding deal
type variables, relatively smaller deals exhibit significantly stronger
post-acquisition performance.
In another robustness test and to ensure that our results are not
affected by any association between firm profitability and insider CFO
succession, we partition our sample into firms with low and high
profitability using industry median profitability values and re-estimate
the regression models. In unreported results we find that insider CFOs
achieve significantly higher two-year post acquisition returns for both
high (p value = 0.04) and low profitability (p value = 0.02) firms.
5. Results
5.1. Sample characteristics and univariate analysis
5.2.1. Robustness tests: Alternative model specification and performance
metric
To test the robustness of our results, we use an alternative measure
of firm operating performance, AltPerf, defined as the operating income
before depreciation scaled by book assets in Models 1 and 2 of Table 4.
Additionally, we augment Eq. (1) with additional firm control variables,
namely the ratio of research and development to book value of assets (R
Panels A and B in Table 1 present summary characteristics for the
acquirer and deal types, respectively. Panel A reveals that acquirer firm
characteristics differ for the insider and outsider CFO subsamples. Firms
with insider CFOs have lower MTB, lower research and development (R
&D) and higher capital expenditure (Capex). Panel B shows that, on a
univariate basis, acquirers with insider CFOs achieve higher operating
performance one and two years post-acquisition, on average. Further,
the data indicate that insiders acquire a higher proportion of public
targets and smaller relative size deals compared to outsider CFOs. The
5
244
Our results are robust to excluding the financial and utility sector firms.
Journal of Business Research 118 (2020) 240–252
1.00
0.00
1.00
0.25
0.03
1.00
&D) and capital expenditures to book assets (Capex) to reflect firm innovation and investments. The positive and significant coefficients on
Insider in all four models buttress those from Table 3, confirming our
first hypothesis and demonstrating that our findings are robust to the
use of an alternative performance measure and additional firm controls.
5.2.2. Robustness tests: Other key variables
Bertrand and Schoar (2003) document that managers with an MBA
are more likely to utilize net present value techniques (essential for
valuing acquisitions) and follow more aggressive strategies. In addition,
the organizational capabilities of a firm hinge on the education and
capabilities of its management (Dhir et al., 2019). To control for any
influence of educational background on acquisition decisions, we hand
collect this information (MBA) from public sources and include an
education variable for CFOs, MBA, that takes a value of 1 if the CFO has
an MBA, and 0 otherwise (Table 5, Model 1).
Further, research has demonstrated a strong causal relationship
between executive overconfidence and acquisition performance. There
is evidence that CEO overconfidence affects the likelihood and the
success of acquisitions (Malmendier & Tate, 2008). Overconfident CEOs
over-estimate their ability to generate returns, overpay for targets, and
are more likely to choose diversifying acquisitions (Malmendier & Tate,
2008). Acquisition premiums and shareholder losses increase with CEO
hubris (Yilmaz & Mazzeo, 2014). Additionally, with respect to investment decisions, overconfident CFOs use lower discount rates in valuation (inflating value), invest more and use more debt (Ben-David,
Graham, & Harvey, 2007). In contrast, Zheng (2012) indicates that
while overconfident CEOs with excess cash or leverage capacity overspend on acquisitions, this is not the case for overconfident CFOs.
It could be argued that the relationship between insider CFOs and
acquisition performance may be driven by a difference in overconfidence between insider and outsider CFOs. In addition to controlling for CFO education, we address this potential omitted variable bias
by including three different proxies for CFO overconfidence - H100
(Table 5, Model 2), Rel_Power (Table 5, Model 3) and OC_Options
(Table 5, Model 4). Typically, executives are considered to be more
overconfident if they exhibit over-optimism about future firm prospects
in their actions. One such measure of overconfidence used frequently in
the literature is delaying the exercise of highly in-the-money options.
Following prior literature (see Malmendier, Tate, & Yan, 2011), we
create a proxy for CFO overconfidence, H100, which is a dummy
variable that takes a value of 1 if the CFO holds vested options which on
average are at least 100% in-the-money at the end of the fiscal year. We
calculate the per-option realizable value using ExecuComp variables by
computing the ratio of realizable value of exercisable options (opt_unex_exer_est_val) to the number of exercisable options (opt_unex_exer_num). The average exercise price of the options is then estimated as
the difference of the per-option realizable value from the fiscal year-end
stock price (prccf). Next, we compute the average percent moneyness of
the options as the ratio of per-option realizable value to average exercise price (Core & Guay, 2002).
We also utilize two additional CFO overconfidence proxies based on
Schrand and Zechman (2012), namely, Rel_Power and OC_Options.
Rel_Power, takes into consideration CFO pay relative to that of the CEO
which controls for variations in the compensation levels and structure.
To arrive at this variable, we compute relative cash compensation,
defined as the ratio of the CFO’s salary plus bonus to that of the CEO,
and the relative non-cash compensation, defined as non-cash compensation (total compensation less cash compensation as a proportion of
the total compensation) for the CFO relative to that of the CEO, averaged over the second and third year of the CFO’s tenure. We then
compute the variable Rel_Power, as the sum of the standardized values
(where the mean is zero and standard deviation is one) of these two
overconfidence variables. The second variable, OC_Options, is a dummy
variable that takes a value of 1 if the option exercise delay (natural
logarithm of the value of the CFO’s in-the-money unexercised but
Perft+1
Perft+2
Prodt-1,t+1
Prodt-1,t+2
Insider
Female
Age
Size
MTB
Leverage
Profitability
R&D
Capex
Cash_Only
Pub_Tgt
Rel_Size
Diversifying
Rel_Power
MBA
H100
OC_Options
LogHoldings
F_Confidence
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
1.00
0.82
0.14
0.06
0.06
0.03
0.02
0.01
0.31
−0.07
0.64
−0.12
0.05
0.04
0.02
−0.09
−0.02
−0.01
0.00
0.16
0.08
0.08
0.01
1.00
0.09
0.16
0.06
0.03
0.03
0.01
0.28
−0.07
0.56
−0.10
0.04
0.04
0.03
−0.07
−0.03
−0.01
0.00
0.13
0.08
0.08
0.02
1.00
0.73
−0.01
0.00
−0.02
−0.10
−0.05
−0.02
−0.18
0.04
−0.09
0.01
−0.02
0.05
−0.01
−0.01
0.00
−0.04
−0.02
−0.07
0.00
1.00
−0.01
0.01
−0.02
−0.12
−0.04
−0.03
−0.19
0.07
−0.09
0.03
−0.03
0.07
−0.01
−0.02
0.01
−0.06
−0.03
−0.08
0.01
1.00
0.00
−0.10
0.12
−0.04
0.02
0.04
−0.12
0.07
−0.01
0.04
−0.02
0.02
−0.05
−0.12
−0.04
0.03
0.05
0.02
1.00
−0.07
−0.01
0.01
−0.04
0.03
−0.05
−0.03
0.02
0.01
−0.01
−0.03
0.03
−0.02
−0.02
0.00
0.02
−0.03
1.00
0.16
−0.04
−0.04
0.01
0.01
−0.08
0.02
−0.02
−0.07
0.02
0.07
0.04
−0.05
0.24
0.12
−0.03
1.00
−0.20
0.21
0.01
−0.29
−0.11
−0.06
0.14
−0.16
0.11
0.06
0.06
−0.11
0.15
0.24
0.22
1.00
−0.26
0.42
0.29
0.06
−0.02
0.01
−0.03
−0.02
0.01
0.01
0.30
0.07
0.17
−0.06
1.00
−0.08
−0.32
0.06
−0.05
−0.06
0.01
0.05
−0.06
0.01
−0.05
0.00
−0.03
0.16
1.00
−0.25
0.14
0.02
−0.01
−0.05
0.00
−0.03
−0.01
0.22
0.06
0.12
−0.03
1.00
−0.06
0.02
0.04
−0.01
−0.11
0.03
0.04
0.03
0.01
0.01
−0.05
1.00
−0.04
−0.01
0.01
−0.12
−0.04
−0.03
0.12
−0.05
−0.02
−0.10
1.00
0.27
0.10
−0.09
−0.01
0.01
0.00
0.01
−0.07
−0.01
1.00
0.28
−0.19
−0.01
0.01
−0.02
−0.01
0.02
0.09
1.00
−0.11
−0.03
−0.03
−0.02
−0.05
−0.07
0.04
1.00
0.05
0.04
−0.04
0.02
0.07
0.01
1.00
−0.05
0.00
0.04
0.09
−0.02
1.00
−0.01
0.02
−0.02
0.01
1.00
0.22
0.19
−0.06
(22)
(21)
(20)
(19)
(18)
(17)
(16)
(15)
(14)
(13)
(12)
(11)
(10)
(9)
(8)
(7)
(6)
(5)
(4)
(3)
(2)
(1)
Table 2
Pairwise Correlation. The table shows pairwise correlation between the dependent and control variables. All the variables are winsorized at 1 and the 99 percent levels. See Table A.1 for variable definitions.
(23)
M. Iskandar-Datta and S. Shekhar
245
Journal of Business Research 118 (2020) 240–252
M. Iskandar-Datta and S. Shekhar
Table 3
Post-acquisition operating performance. The table presents the regression results for the sample comprising of year-wise acquisitions spanning the years 1994 to 2014
with one- (Perft+1) and two-year (Perft+2) post-acquisition operating performance as the dependent variables and Insider, an indicator variable reflecting insider
CFOs, as the test variable. Firm control variables are winsorized at the 1st and 99th percentiles. The variables are defined in Table A.1. Models have firm clustered
standard errors and include year and industry fixed effects. Robust p-values are reported in parentheses. ***, ** and * indicate statistical significance at 1%, 5% and
10% levels, respectively.
Variables
Insider
(1)
Perft+1
(2)
Perft+1
(3)
Perft+1
(4)
Perft+2
(5)
Perft+2
(6)
Perft+2
0.0144***
(0.000)
0.0096***
(0.002)
0.0095***
(0.002)
0.0139***
(0.001)
0.0104***
(0.005)
0.0104***
(0.005)
0.0059
(0.238)
0.0002
(0.619)
0.0057
(0.250)
0.0001
(0.669)
0.0023
(0.194)
−0.0018
(0.307)
−0.0006
(0.963)
0.4662***
(0.000)
0.0020
(0.305)
−0.0018
(0.308)
−0.0003
(0.979)
0.4624***
(0.000)
−0.0035
(0.911)
2,225
0.409
Yes
Yes
Yes
0.0041
(0.128)
−0.0013
(0.753)
−0.0182**
(0.041)
−0.0013
(0.687)
0.0023
(0.937)
2,225
0.412
Yes
Yes
Yes
CFO Controls
Female
0.0018
(0.713)
0.0003
(0.323)
Age
0.0016
(0.745)
0.0002
(0.399)
Acquirer Firm Controls
Size
0.0016
(0.240)
−0.0029
(0.124)
0.0040
(0.759)
0.5293***
(0.000)
MTB
Leverage
Profitability
0.0012
(0.454)
−0.0031
(0.109)
0.0033
(0.776)
0.5241***
(0.000)
Deal Controls
Cash_Only
Pub_Tgt
Rel_Size
Diversifying
Constant
Observations
R-squared
Industry FE
Year FE
Firm Clustered
0.0762***
(0.001)
2,698
0.227
Yes
Yes
Yes
−0.0154
(0.533)
2,319
0.467
Yes
Yes
Yes
0.0026
(0.276)
−0.0029
(0.437)
−0.0402***
(0.000)
−0.0006
(0.816)
−0.0027
(0.900)
2,319
0.475
Yes
Yes
Yes
exercisable options) is greater than the 75th percentile of the industry.
Greater delay in exercising in-the-money exercisable options signifies
the executive’s overoptimistic view about the future and may be used as
a measure of overconfidence. Finally, to control for the total option
holdings for an executive, we also add LogHoldings to the model, defined as the sum of in-the-money unexercised options both exercisable
and unexercisable and the shares owned (Schrand & Zechman, 2012).
Further, we include a firm overconfidence variable to control for the
behavioral traits of other decision-making executives. Utilizing Schrand
and Zechman (2012) firm overconfidence proxy, F_Confidence takes a
value of 1 if at least three of five of the following scores are positive: (1)
industry-adjusted excess investment (measured as the residual from a
regression of book asset growth on sales growth); (2) industry-adjusted
net dollars of acquisitions made by the firm; (3) industry-adjusted longterm debt scaled by market value of the firm; (4) dummy variable indicating the presence of risky debt, such as convertible debt, or preferred stock; and (5) industry-adjusted dividend yield of the firm. These
five measures are calculated as of the fiscal year preceding the acquisition; the industry adjustment is done using 75th percentile value for
the industry.
The variables discussed in this section augment the baseline model
in Equation (1). The controls for CFO education, CFO overconfidence
and firm overconfidence are included in the models one at a time to
understand their individual impact on the relationship between insider
0.0891***
(0.001)
2,589
0.225
Yes
Yes
Yes
CFOs and acquisition performance and to reduce multicollinearity.
The results presented in Table 5 support our first hypothesis. The
positive relationship between insider CFOs and post-acquisition performance is robust to including control variables proxying for CFO
education and CFO overconfidence, and firm overconfidence. The
coefficients for Insider remain positive and significant for all the models.
Additionally, the results hold when we employ one-year post acquisition performance (untabulated) as the dependent variable.
Moreover, we find a significant positive relationship between CFO’s
education and acquisition performance, supporting the results in
Bertrand and Schoar (2003) that MBA CEOs, in general, achieve better
operating return on assets. Two-year post-acquisition performance for
MBA CFOs is 0.7 percentage points higher than those without an MBA
(Model 1). In Models 2, 3, and 4, the coefficients on variables proxying
for CFO overconfidence do not support the notion that CFOs with
overconfidence undertake value destroying acquisitions. This is in
contrast to prior studies finding that overconfident CEOs destroy firm
value through acquisitions (Malmendier & Tate, 2008). Finally, Model 5
reveals that the effect of firm overconfidence on acquisition performance is negative, as expected, but not significant after controlling for
other variables.
246
Journal of Business Research 118 (2020) 240–252
M. Iskandar-Datta and S. Shekhar
Table 4
Robustness tests: Alternative post-acquisition performance measure and additional firm controls. The table presents the regression results for the sample
comprising of year-wise acquisitions spanning the years 1994 to 2014 with an
alternative measure for one- and two-year post-acquisition operating performance (AltPerf) as the dependent variables and Insider, an indicator variable
reflecting insider CFOs, as the test variable. Firm variables are winsorized at the
1st and 99th percentiles. The variables are defined in Table A.1. All the models
have firm clustered standard errors and include year and industry fixed effects.
Robust p-values are reported in parentheses. ***, ** and * indicate statistical
significance at 1%, 5% and 10% levels, respectively.
Variables
Insider
(1)
AltPerft+1
(2)
AltPerft+2
(3)
Perft+1
(4)
Perft+2
0.0134***
(0.000)
0.0134***
(0.001)
0.0080**
(0.028)
0.0075*
(0.076)
0.0068
(0.209)
0.0002
(0.636)
0.0091
(0.101)
0.0000
(0.984)
Table 5
Robustness tests: Controlling for CFO education, pay and overconfidence. The
table presents regression results where two-year post-acquisition operating
performance is the dependent variable and Insider, an indicator variable reflecting insider CFOs, is the test variable. All firm variables are winsorized at
the 1st and 99th percentiles. The variables are defined in Table A.1. All the
models have firm clustered standard errors and include year and industry fixed
effects. Robust p-values are reported in parentheses. ***, ** and * indicate
statistical significance at 1%, 5% and 10% levels, respectively.
Variables
Insider
MBA
H100
CFO Controls
Female
Age
0.0003
(0.955)
0.0003
(0.347)
0.0033
(0.549)
0.0003
(0.456)
MTB
Leverage
Profitability
R&D
−0.0008
(0.636)
−0.0029*
(0.084)
0.0211
(0.142)
0.5228***
(0.000)
−0.0003
(0.880)
−0.0021
(0.246)
0.0193
(0.178)
0.4620***
(0.000)
Capex
Pub_Tgt
Rel_Size
Diversifying
Constant
Observations
R-squared
Industry FE
Year FE
Firm Clustered
0.0022
(0.400)
−0.0028
(0.474)
−0.0397***
(0.000)
−0.0014
(0.614)
0.0344
(0.273)
2,156
0.470
Yes
Yes
Yes
0.0046*
(0.097)
−0.0022
(0.606)
−0.0186*
(0.053)
−0.0021
(0.489)
0.0370
(0.216)
2,070
0.407
Yes
Yes
Yes
(3)
Perft+2
(4)
Perft+2
(5)
Perft+2
0.0110***
(0.004)
0.0076**
(0.029)
0.0099**
(0.028)
0.0109***
(0.007)
0.0113***
(0.005)
0.0104***
(0.006)
−0.0015
(0.775)
OC_Options
−0.0021
(0.249)
LogHoldings
F_Confidence
0.0018
(0.394)
−0.0042*
(0.058)
−0.0013
(0.933)
0.5748***
(0.000)
−0.0098
(0.866)
−0.0582
(0.424)
CFO Controls
Acquirer Firm
Controls
Deal Controls
Observations
R-squared
Industry FE
Year FE
Firm Clustered
0.0016
(0.510)
−0.0023
(0.240)
0.0026
(0.851)
0.5201***
(0.000)
−0.0293
(0.618)
−0.0335
(0.629)
0.0035
(0.257)
−0.0012
(0.811)
−0.0373***
(0.002)
−0.0012
(0.721)
0.0007
(0.972)
1,570
0.522
Yes
Yes
Yes
0.0082*
(0.093)
−0.0000
(0.285)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
−0.0046
(0.281)
Yes
Yes
Yes
2,225
0.414
Yes
Yes
Yes
Yes
1,545
0.370
Yes
Yes
Yes
Yes
1,958
0.416
Yes
Yes
Yes
Yes
1,990
0.416
Yes
Yes
Yes
Yes
2,225
0.412
Yes
Yes
Yes
(2.1)
Acquisitionsi, t + 1 = f [ 0, (Insider )i, (CFOControls )i , (AcquirerFirmControls )i, t 1]
Next, we examine the differences in deal type through logit models
with the dummy variables Cash_Only, Pub_Tgt and Diversifying as the
dependent variables.
Deal Controls
Cash_Only
(2)
Perft+2
Rel_Power
Acquirer Firm Controls
Size
(1)
Perft+2
**
0.0067
(0.038)
−0.0018
(0.736)
−0.0253**
(0.021)
−0.0011
(0.771)
0.0348
(0.163)
1,509
0.481
Yes
Yes
Yes
DealTypei, t + 1 = f [ 0, (Insider )i, (CFOControls )i, (AcquirerFirmControls )i, t 1, (DealControls )i, t ]
(2.2)
where Deal Type represents Cash_Only, Diversifying, or Pub_Tgt.
Finally, we employ a multivariate model where Rel_Size is the dependent variable to understand deal size differences.
Rel _Sizei, t + 1 =
0
+
1
Insideri +
2 3
(AcquirerFirmControls )i, t
(DealControls )i, t +
i, t + 1
(CFOControls )i +
1
+
4 7
8 10
(2.3)
If insider CFOs indulge in fewer acquisitions or different deal types
relative to outsider CFOs, the coefficient for Insider should be significant. The results for Eqs. (2.1), (2.2) and (2.3) reported in Table 6
show that insider CFOs do not differ significantly from outsider CFOs in
acquisition likelihood or the type of deals (e.g., diversifying deals, cashonly deals or public-target deals) nor do they differ in terms of the
relative deal size. These findings contrast with those in Ferris et al.
(2015) for insider CEOs. Our results imply that the superior post acquisition performance of the insider CFOs cannot be attributed to the
types of deals they undertake.
5.3. Source of value creation in acquisitions
In order to understand the factors driving the superior acquisition
returns achieved by insider CFOs, we examine the difference in acquisition behavior between insider and outsider CFOs. We scrutinize the
source of value creation in acquisitions by investigating if insider CFOs
acquire different types of deals and whether they are better at identifying targets and achieving post-acquisition synergy and integration
gains.
5.3.2. Deal types and performance
Next, to ensure that our results are not driven by specific deal types,
we re-estimate the baseline regression model on subsamples partitioned
by the various deal types. Generally speaking, the results in Table 7
support our earlier findings that outsider CFOs achieve subpar postacquisition performance compared to insiders across deal types. More
specifically, the results indicate that insider CFOs exhibit significantly
positive post-acquisition returns for Cash_Only deals (Panel A of
5.3.1. Differences in acquisition likelihood and the deal types
To assess if the source of value creation in acquisitions is due to
differences in the type of deals undertaken by insider and outsider
CFOs, we first assess the acquisition likelihood through a logit model
where the dependent variable, Acquisitions, takes a value of 1 if an
acquisition is completed during the year, and 0 otherwise.
247
Journal of Business Research 118 (2020) 240–252
M. Iskandar-Datta and S. Shekhar
Table 6
CFO status and deal types. The table presents the regression results where acquisition likelihood and deal types are the dependent variables and Insider, an
indicator variable reflecting insider CFOs, is the test variable. The variables are
defined in Table A.1. All firm control variables are winsorized at the 1st and
99th percentiles. All the models have firm clustered standard errors and include
year and industry fixed effects. Robust p-values are reported in parentheses.
***, ** and * indicate statistical significance at 1%, 5% and 10% levels, respectively.
Variables
Insider
CFO Controls
Acquirer Firm
Controls
Deal Controls
Observations
R-squared
Industry FE
Year FE
Firm Clustered
(1)
Acquisition
(2)
Cash_Only
Deals
(3)
Public
Target
Deals
(4)
Rel_Size
−0.1129
(0.150)
Yes
Yes
0.0257
(0.821)
Yes
Yes
0.0258
(0.840)
Yes
Yes
−0.0025
(0.708)
Yes
Yes
0.1612
(0.223)
Yes
Yes
No
14,254
N.A.
Yes
Yes
Yes
Yes
2,422
N.A.
Yes
Yes
Yes
Yes
2,376
N.A.
Yes
Yes
Yes
Yes
2,442
0.178
Yes
Yes
Yes
Yes
2,405
N.A.
Yes
Yes
Yes
Table 7
Insiders versus outsiders by deal types. The table presents the regression results
where one- and two-year post-acquisition operating performance are the dependent variables and Insider, an indicator variable reflecting insider CFOs, is
the test variable. The variables are defined in Table A.1. All firm control variables are winsorized at the 1st and 99th percentiles. All the models have firm
clustered standard errors and include year and industry fixed effects. Robust pvalues are reported in parentheses. ***, ** and * indicate statistical significance
at 1%, 5% and 10% levels, respectively.
(5)
Diversifying
Deals
Panel A. Cash only deals vs. other financing methods
(1)
Perft+1
Variables
(2)
Perft+2
(3)
Perft+1
Cash Only Deals
***
Insider
CFO Controls
Acquirer Firm Controls
Deal Controls
Observations
R-squared
Other Financing
***
0.0140
(0.000)
Yes
Yes
Yes
1,307
0.571
(4)
Perft+2
0.0123
(0.003)
Yes
Yes
Yes
1,250
0.498
−0.0012
(0.780)
Yes
Yes
Yes
1,012
0.440
0.0020
(0.657)
Yes
Yes
Yes
975
0.376
Panel B. Diversifying vs. non-diversifying deals
(1)
Perft+1
Variables
Table 7), for core (non-diversifying) deals (Panel B), and for larger deals
(Panel D). Also, insider CFOs exhibit superior performance for both
public and private target acquisitions as shown in Panel C of Table 7
which contrasts with earlier research showing that public target acquisitions tend to exhibit weaker post acquisition performance (Fuller,
Netter, & Stegemoller, 2002). This empirical evidence shows that insider CFOs do not underperform outsider CFOs for any deal type subsample. If the results are driven by over-representation of certain deal
types in the sample, we would expect to find outsider CFOs outperforming their insider counterparts in at least some of the subsamples. Moreover, the fact that insiders are able to show improved
performance in large deals, which is in contrast to prior literature
findings on large deals, attests to insiders’ ability to extract synergies
due to their more in-depth firm-specific knowledge.
To better understand the role of CFO overconfidence and education
on the type of deals undertaken, we re-estimate Eqs. (2.1), (2.2) and
(2.3) utilizing CFO education, and other firm and CFO overconfidence
variables. The (untabulated) results show that while overconfident
CFOs have a greater tendency to make acquisitions, they do not indulge
in diversifying deals. This is in contrast to overconfident CEOs who are
found to indulge in diversifying transactions (Malmendier & Tate,
2008). Additionally, we find that CFOs with MBA degrees have a
greater tendency to undertake acquisitions endorsing the finding in
Bertrand and Schoar (2003) that CEOs with MBAs undertake more
aggressive strategies.
The findings in this section, in combination with the evidence that
insider CFOs do not exhibit different acquisition likelihood and do not
engage in different deal types compared to outsiders, suggest that the
superior acquisition returns achieved by insiders are not due to deal
characteristics. Rather, insider CFOs are better able to identify appropriate targets for their firms.
(2)
Perft+2
(3)
Perft+1
Diversifying Deals
Insider
CFO Controls
Acquirer Firm Controls
Deal Controls
Observations
R-squared
0.0011
(0.784)
Yes
Yes
Yes
976
0.509
0.0038
(0.414)
Yes
Yes
Yes
947
0.435
(4)
Perft+2
Core Deals
0.0143***
(0.001)
Yes
Yes
Yes
1,343
0.498
0.0137***
(0.006)
Yes
Yes
Yes
1,278
0.434
(3)
Perft+1
(4)
Perft+2
Panel C. Public vs. private target deals
(1)
Perft+1
Variables
(2)
Perft+2
Public Targets
***
Insider
CFO Controls
Acquirer Firm Controls
Deal Controls
Observations
R-squared
0.0145*
(0.054)
Yes
Yes
Yes
518
0.595
0.0216
(0.002)
Yes
Yes
Yes
539
0.593
Private Targets
0.0057*
(0.079)
Yes
Yes
Yes
1,780
0.457
0.0091**
(0.018)
Yes
Yes
Yes
1,707
0.373
Panel D. Large vs. small deals
(1)
Perft+1
Variables
(2)
Perft+2
(3)
Perft+1
Large Deals
Insider
CFO Controls
Acquirer Firm Controls
Deal Controls
Observations
R-squared
5.3.3. Differences in target selection, and post-acquisition synergy and
integration
In this section we test if the insider ’s better post-acquisition performance is due to his/her ability to extract higher synergy gains from
the acquisition, which are otherwise similar in terms of deal characteristics to the acquisitions undertaken by outsider CFOs. We measure
synergy gains by the changes in factor productivity pre- and post-acquisition. Per Field and Mkrtchyan (2017), we define factor productivity as the residual from the following model:
Ln (Sales )i, t + 1 = 0 + 1
0.0097***
(0.002)
Yes
Yes
Yes
2,231
0.471
0.0113***
(0.003)
Yes
Yes
Yes
2,143
0.415
Ln (Employees )i, t + 1 + 2
Ln (COGS )i, t + 1 + i, t + 1
(4)
Perft+2
Small Deals
−0.0145
(0.356)
Yes
Yes
Yes
88
0.875
Ln (PP &E )i, t + 1 + 3
−0.0245
(0.356)
Yes
Yes
Yes
82
0.832
(3)
The dependent variable, Ln(Sales), is the natural logarithm of sales,
Ln(Employees) is the natural logarithm of labor (proxied by number of
employees), Ln(PP&E) is the natural logarithm of fixed assets (proxied
by net property, plant and equipment or PP&E), and Ln(COGS) is the
natural logarithm of materials (proxied by cost of goods sold or COGS).
248
Journal of Business Research 118 (2020) 240–252
M. Iskandar-Datta and S. Shekhar
Industry and year fixed effects are also included in the regression.6 The
subscript i represents the acquirer firm and t the year of acquisition. The
residuals from Eq. (3) measure factor productivity, Prodt+1. We compute one-year change in factor productivity, denoted by Prodt-1, t+1, as
the difference between Prodt+1 and Prodt-1. This variable is then utilized
in Equation (4) to assess the importance of CFO status to changes in
factor productivity following the acquisition.
Prodt
1, t + 1
=
0
+
1
Insideri +
2 3
(AcquirerFirmControls )i, t
(DealControls )i, t +
i, t + 1
(CFOControls )i +
1
+
Table 8
One and two-year post-acquisition change in factor productivity for the acquirer. The table presents the regression results for acquisitions spanning the
years 1994 to 2014 with one and two-year post-acquisition change in factor
productivity as the dependent variables and Insider, an indicator variable reflecting insider CFOs, as the test variable. The variables are defined in Table
A.1. All firm control variables are winsorized at the 1st and 99th percentiles. All
the models have firm clustered standard errors and include year and industry
fixed effects. Robust p-values are reported in parentheses. ***, ** and * indicate
statistical significance at 1%, 5% and 10% levels, respectively.
4 7
8 11
(4)
Variables
Insider
Table 8 presents the results corresponding to Eq. (4). Although insider CFOs do not differ in their deal choices nor in acquisition likelihood, they differ significantly from outsiders in terms of improvements in post-acquisition factor productivity. This evidence suggests
that insider CFOs are superior to their counterparts in identifying targets which can yield higher synergy benefits and in achieving better
post-acquisition integration. These findings corroborate our second
hypothesis. With regards to control variables, the coefficients indicate
that larger and more profitable firms achieve lesser post-acquisition
productivity gains.
For robustness, we re-estimate Eq. (4) utilizing the change in factor
productivity from year −1 to year + 2, Prodt-1, t+2, as the dependent
variable, while augmenting the model to include the additional control
variables introduced in Table 5. The results reported in Table 9 confirm
those in Table 8 where the coefficients for Insider are significantly positive in all models. Moreover, similar to our results on acquisition
performance, we find that MBA CFOs achieve significantly higher
productivity gains post acquisition. Also, as with prior results on acquisition performance, we do not find any relationship between CFO
overconfidence and power, and post-acquisition productivity. These
results hold for one-year post acquisition factor productivity.
(1)
Prodt-1,t+1
(2)
Prodt-1,t+1
(3)
Prodt-1,t+2
(4)
Prodt-1,t+2
0.0196**
(0.041)
0.0199**
(0.040)
0.0203*
(0.056)
0.0208*
(0.051)
−0.0045
(0.843)
−0.0006
(0.504)
−0.0046
(0.841)
−0.0006
(0.505)
−0.0137***
(0.003)
−0.0002
(0.955)
−0.0129
(0.801)
−0.7192***
(0.000)
−0.0123***
(0.010)
0.0003
(0.935)
−0.0122
(0.812)
−0.7180***
(0.000)
0.1411
(0.177)
1,846
0.118
Yes
Yes
Yes
0.0121
(0.179)
−0.0094
(0.375)
0.0540**
(0.034)
0.0047
(0.624)
0.1089
(0.294)
1,846
0.120
Yes
Yes
Yes
CFO Controls
Female
Age
−0.0062
(0.737)
−0.0001
(0.908)
−0.0061
(0.741)
−0.0001
(0.912)
Acquirer Firm Controls
Size
MTB
Leverage
Profitability
−0.0111***
(0.007)
−0.0083
(0.112)
−0.0302
(0.554)
−0.5642***
(0.000)
−0.0104**
(0.017)
−0.0082
(0.120)
−0.0309
(0.545)
−0.5616***
(0.000)
Deal Controls
Cash_Only
Pub_Tgt
Rel_Size
6. Discussion and implications
Diversifying
6.1. Theoretical implications
Constant
This study makes theoretical and empirical contributions to the
current literature on mergers and acquisitions. First, the paper extends
the literature by presenting a theoretical framework to analyze postacquisition performance from the perspective of executive succession.
We show that insider CFOs, due to the greater opportunities to have
established linkages within the firm, can benefit the acquiring firm by
deftly utilizing organizational capabilities and knowledge integration,
which are key determinants of post-acquisition success (Dhir et al.,
2019).
Second, we test the hypotheses derived from this theoretical framework empirically by examining post-acquisition operating performance for a large sample that spans over two decades utilizing handcollected data on CFO characteristics. Confirming our hypotheses, we
find strong empirical evidence that acquirer firms with insider CFOs
achieve better operating performance and higher factor productivity
gains post-acquisition, after controlling for firm characteristics (e.g.,
size, leverage, growth and profitability), CFO characteristics (e.g., age
and gender), and deal types. This superior performance is manifested in
the one- and two-year post acquisition measures. We also conduct a
battery of robustness tests by utilizing an alternative performance
measure (for the dependent variable), and addressing potential omitted
variable bias by expanding the models to include additional variables at
Observations
R-squared
Industry FE
Year FE
Firm clustering
0.1423*
(0.067)
1,922
0.129
Yes
Yes
Yes
0.0016
(0.847)
−0.0045
(0.661)
0.0234
(0.458)
0.0003
(0.972)
0.1300*
(0.093)
1,922
0.129
Yes
Yes
Yes
the firm level (such as capital expenditure, innovation, and firm overconfidence) and variables for the CFO controlling for CFO education
and CFO overconfidence. Our results are robust to these tests. The
empirical analysis, demonstrating insider CFOs’ superior performance,
adds to the extant literature on insider CEOs (Clutterbuck, 1998).
Third, this study contributes to the acquisition literature by applying the resource-based and knowledge-based views to determine the
channels through which insider/outsider CFOs create acquisition value.
To understand the specific channel, we examine the differences in deal
types and integration benefits for insider and outsider CFOs. With regards to deal type, our investigation reveals that acquisitions made by
insider CFOs are not significantly different from those of outsider CFOs
in terms of deal size, diversifying vs. core deals, public vs. private
targets, and financing methods. This contrasts with the empirical evidence for insider CEOs who are found to make fewer acquisition bids,
buy larger targets, and rely less on cash payments for deal financing
(Ferris et al., 2015). Interestingly, while insider and outsider CFOs do
not differ in terms of acquisition deal types, insider CFOs achieve significantly higher factor productivity gains. In combination, this evidence suggests that the ability to identify good targets which can yield
higher synergy benefits and superior post-acquisition integration allows
6
For this analysis, we exclude the financial and utility sector firms (SIC codes
6000–6999 and 4800–4999) as the productivity measure is more relevant for
the non-financial sector and the productivity in the utility industry may be
governed by other unobserved dynamics.
249
Journal of Business Research 118 (2020) 240–252
M. Iskandar-Datta and S. Shekhar
and training internal talent, and establishing effective leadership transition processes. Another area where our results could have a strong
bearing is executive compensation and its use as a tool to ensure successful internal leadership succession. In addition, this paper highlights
a crucial factor, namely CFO succession, that needs to be factored in
stock valuation models, especially around the time of acquisitions.
Other key findings relate to the qualifications of CFOs. We find that
CFOs with MBAs exhibit superior post acquisition performance and
productivity gains. This complements the findings of Bertrand and
Schoar (2003) that CEOs with MBAs are associated with higher returns
on assets. Further, unlike overconfident CEOs who have been shown to
undertake value destroying acquisitions (Yilmaz & Mazzeo, 2014) and
indulge in diversifying deals (Malmendier & Tate, 2008), we do not find
any evidence that overconfident CFOs engage in such behavior. However, overconfident CFOs are similar to overconfident CEOs in that they
display higher tendency to acquire. These findings could help management establish a human resource policy that promotes employees
with attributes most amenable for the firm’s acquisition strategy.
Table 9
Post-acquisition factor productivity gains with education, pay and overconfidence controls. The table presents the regression results where the twoyear post-acquisition change in factor productivity is the dependent variable
and Insider, an indicator variable reflecting insider CFOs, is the test variable.
The variables are defined in Table A.1. All firm control variables are winsorized
at the 1st and 99th percentiles. All the models have firm clustered standard
errors and include year and industry fixed effects. Robust p-values are reported
in parentheses. ***, ** and * indicate statistical significance at 1%, 5% and 10%
levels, respectively.
Variables
Insider
MBA
H100
(1)
Prodt-1,t+2
(2)
Prodt-1,t+2
(3)
Prodt-1,t+2
(4)
Prodt-1,t+2
(5)
Prodt-1,t+2
0.0221**
(0.038)
0.0195*
(0.095)
0.0306**
(0.035)
0.0212*
(0.068)
0.0213*
(0.063)
0.0208*
(0.051)
Rel_Power
0.0016
(0.934)
OC_Options
−0.0015
(0.731)
LogHoldings
F_Confidence
CFO Controls
Acquirer Firm
Controls
Deal Controls
Observations
R-squared
Industry FE
Year FE
Firm clustering
0.0184
(0.217)
−0.0000
(0.300)
6.3. Limitations and future research
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
0.0084
(0.490)
Yes
Yes
Yes
1,846
0.122
Yes
Yes
Yes
Yes
1,352
0.149
Yes
Yes
Yes
Yes
1,649
0.122
Yes
Yes
Yes
Yes
1,679
0.118
Yes
Yes
Yes
Yes
1,846
0.120
Yes
Yes
Yes
While our analysis offers significant contributions to the literature,
future researchers can address the limitations of our study. For example, our results hold true with both industry and time fixed effects;
however, there could still be some residual industry and time induced
variations in the strength of the relationship between CFO succession
status and post-acquisition performance. Studying if the insider CFOs
are more critical to post-acquisition success in some industries than
others, could further contribute to the acquisition performance literature. Moreover, this study examines only public companies in the U.S. It
would be interesting to extend the analysis to acquisitions in other
countries and to cross-border acquisitions. Replicating our study in the
context of emerging economies could also offer some additional insights. While this paper examines post-acquisition performance from
the context of CFO succession, there could be other CFO attributes offering interesting insight to understanding the acquisition value creation. For example, future research could investigate the degree to which
the minority status or the ethnicity of the CFO is a factor in acquisition
behavior and whether such CFO characteristic has a bearing on type of
acquisitions undertaken. Another line of research could examine if
market participants are surprised by this superior post-acquisition
performance achieved by insider CFOs by investigating the acquiring
firm’s post-acquisition stock performance. Another potentially interesting idea could be the influence of CFO succession on post-acquisition
stock price volatility. There could be differences in stock price volatility
if the markets perceive insider CFOs differently as compared to outsider
CFOs.
firms with insider CFOs to experience positive post-acquisition operating performance.
By advancing the literature on acquisitions and CFO succession (i.e.
insiders versus outsiders), our results can serve as a crucial input in
corporate acquisition strategy and inform leadership succession policies. These findings gain significance given recent company trends
indicating a tilt toward hiring outside CFOs7.
6.2. Managerial implications
Our evidence, which contributes to the strand of literature examining the relationship between managerial characteristics and corporate performance (Malmendier & Tate, 2008; Ferris et al., 2015), has
key managerial implications. Acquiring firms can build a competitive
advantage through better integration when their executives have firmspecific knowledge capital with know-how of organizational abilities
and possess established horizontal and vertical professional linkages
within the firm. One implication from our findings is that firms with
plans to pursue an active acquisition strategy stand to gain by focusing
on their internal leadership succession policies, grooming, retaining
7
Declaration of Competing Interest
None.
https://www.wsj.com/articles/more-u-s-companies-consider-outside-cfo-candidates-11565775003, accessed on August 16, 2019.
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Journal of Business Research 118 (2020) 240–252
M. Iskandar-Datta and S. Shekhar
Appendix A
Table A1
Variables
Dependent variables
Acquisitions
Perft+2
Prodt-1,t+2
CFO Controls
Age
Female
Insider
MBA
Acquirer Firm Controls
Size
Market to Book ratio (MTB)
Leverage
Profitability
R&D
Capex
SG&A
Deal Controls
Cash_Only
Pub_Tgt
Rel_Size
Diversifying
Overconfidence Controls
H100
Rel_Power
OC_Options
LogHoldings
F_Confidence
Description
Dummy variable that takes a value of 1 if an acquisition was completed during the year and 0 otherwise
The industry median adjusted ROA two years post acquisition
Change in factor productivity is difference in factor productivity from year −1 to year + 2 where productivity for a year is the residual from model
that explains logarithm of sales
CFO’s age in years
Dummy variable that takes a value of 1 if the CFO is a female and 0 otherwise
Dummy variable, taking a value of 1 if the CFO is an insider and 0 otherwise
Dummy variable, taking a value of 1 if the CFO had an MBA degree and 0 otherwise
The natural logarithm of book assets for fiscal year end prior to acquisition year
Book value of total assets minus book value of equity plus market value of equity divided by book value of assets, as of fiscal year end prior to
acquisition year
Long-term debt to total assets, measured at the fiscal year end prior to acquisition year
EBITDA to total assets, as of fiscal year end prior to acquisition year
Research and development expenses to book assets at the fiscal year end prior to acquisition year
Capital expenditures to book assets at the fiscal year end prior to acquisition year
SG&A expenditure to book assets at the fiscal year end prior to acquisition year
Dummy variable, taking a value of 1 if the acquisition was financed by cash only and 0 otherwise
Dummy variable equals 1 for public targets, 0 otherwise
Deal value divided by acquirer’s market value of assets
Dummy variable that takes a value of 1 if the 2-digit SIC code of the acquirer differs from that of the target
A dummy variable taking a value of 1 if CFO holds vested options which, on average, are at least 100% in the money at end of fiscal year. Average
moneyness of option is the ratio of fiscal year end stock price to estimated exercise price (i.e. realizable value per option1) minus one.
Equals the sum of standardized values (with a mean of 0 and standard deviation of 1) of two overconfidence indicators: the ratio of CFO’s salary
plus bonus to that of CEO and the ratio of CFO’s total compensation less the salary and bonus to that of CEO, averaged over second and third year
of CFO’s tenure
A dummy variable that takes a value of 1 if the option exercise delay (natural logarithm of the value of the CFO’s in-the-money unexercised but
exercisable options) is greater than 75th percentile of the industry
The natural logarithm of the sum of in-the-money unexercised options both exercisable and unexercisable and shares owned
A dummy variable that takes a value of 1 if at least 3 of following scores are positive: (1) industry-adjusted excess investment (residual from a
regression of book asset growth on sales growth); (2) industry-adjusted net dollars of acquisitions made by the firm; (3) industry-adjusted longterm debt scaled by the market value of the firm; (4) dummy variable indicating the presence of risky debt when firm uses either convertible debt
or preferred stock; and (5) industry-adjusted dividend yield of the firm. Industry adjustments are made using 75th percentile industry value.
1
Realizable value per option is the ratio of the realizable value of the exercisable options (opt_unex_exer_est_val) to the number of exercisable options (opt_unex_exer_num).
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