ISKANDAR SHEKHAR 20 Do insider CFOs deliver better acquisition performance JBR

Contents lists available at ScienceDirect
Journal of Business Research
journal homepage: www.elsevier.com/locate/jbusres
Do insider CFOs deliver better acquisition performance?
Mai Iskandar-Datta
⁎
, Shriya Shekhar
Wayne State University, USA
ARTICLE INFO
Keywords:
Insider
CFO
Mergers and Acquisitions
Factor Productivity
JEL classification:
G30
G34
G40
ABSTRACT
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 ana-
lysis 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 ad-
ditional firm level controls, alternative performance measures, and controls for firm overconfidence and CFO
education, overconfidence and pay.
1. Introduction
The motivation behind corporate acquisition decisions has long
perplexed researchers. Although some acquisitions have strategic mo-
tivations, 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 ac-
tivity (M&A) has rivaled corporate fixed asset investments
1
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 per-
formance. Researchers find that CFO characteristics are more crucial
than those of Chief Executive Officer (CEO) in some corporate deci-
sions, 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 sig-
nificance of the CFO’s role and the importance of executive character-
istics in determining performance renders CFO characteristics a crucial
piece of the puzzle surrounding acquisition success worthy of in-
vestigation.
Examining executive succession, the literature has linked CEO de-
cision-making and firm performance (Clutterbuck, 1998) based on in-
sider/outsider CEO succession. More specific to acquisitions, Ferris,
Jayaraman, and Lim (2015) report that insider CEOs make fewer ac-
quisition bids, buy larger targets, and rely less on cash payments vis-à-
vis 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, sy-
nergy 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 out-
sider CFOs? And, whether insider CFOs are better poised at identifying
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
⁎
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.
Journal of Business Research 118 (2020) 240–252
Available online 03 July 2020
0148-2963/ © 2020 Elsevier Inc. All rights reserved.
T

targets and achieving integration than outsiders.
Our findings offer a number of theoretical and empirical contribu-
tions 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, in-
cluding different identification strategies, various time-windows, and
alternative measures of operating performance. We find that the su-
perior 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 edu-
cation and compensation. Our results extend the literature by identi-
fying the CFO’s insider status as a crucial driver for the acquirer’s post-
acquisition operating performance, thereby adding to the existing evi-
dence 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 fra-
mework regarding the influence of executive succession type on post-
acquisition 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 suc-
cess (Dhir et al., 2019), we posit that the value derived from organi-
zational 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 be-
hind 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 pro-
fessional, social, horizontal, and vertical linkages within the firm), are
better able to utilize organizational capabilities and execute post-ac-
quisition integration. Moreover, complementing Bertrand and Schoar
(2003) findings that CEOs with MBA are associated with higher oper-
ating 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 over-
confident 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, espe-
cially around acquisitions. Finally, our findings on executive over-
confidence 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 re-
ports the results and robustness tests; and Section 6 concludes the paper
with a detailed discussion of the implications and limitations of our
findings.
2. Theoretical background and hypotheses development
In this section, we begin by reviewing three strands of litera-
ture—on post-acquisition performance, on the significance of executive
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 gen-
erally 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 trans-
action 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-acquisi-
tion performance. Investigating the mechanisms contributing to ac-
quisition 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 ef-
fectiveness of value-based management (VBM) — a management ap-
proach 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 success
3
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 fi-
nancing strategies (Graham & Harvey, 2001), to ensuring the realiza-
tion of synergies and successful merger integration (Hommel, Fabich,
Schellenberg, & Firnkorn, 2012). Additionally, Sainani and Florackis
(2017) demonstrate that firms with powerful CFOs exhibit better post-
acquisition 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.
3
https://www.strategyand.pwc.com/books/display/cfo-deal-maker.
4
https://www.financierworldwide.com/role-of-the-cfo-in-ma/#.W-
ojwfZFzm4, accessed on March 31, 2019.
M. Iskandar-Datta and S. Shekhar Journal of Business Research 118 (2020) 240–252
241

2.4. Hypothesis 1: Executive succession and firm performance
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 un-
derstand 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 demon-
strate their worthiness in the organization where simply maintaining
the status quo does not suffice (Quigley & Hambrick, 2012). This pre-
occupation 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 in-
tegration. 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 uti-
lization 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 asses-
sing 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 To-
bin’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.
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 well-
established theories, namely, the resource-based view and the knowl-
edge-based view. The resource-based view (Barney, 1991) attributes
acquisition performance to resource relatedness between the acquirer
and the target (Healy, Palepu, & Ruback, 1992). The knowledge-based
view proposes that the acquisition outcome is influenced by the ac-
quiring firm’s capability to manage the acquisition process. Scholars
suggest that acquisition performance depends on the acquisition pro-
cess 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 dis-
cussion, 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.
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 fi-
nanced 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 af-
fecting 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, suc-
cessful 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 cap-
abilities and knowledge integration, among other factors. Organiza-
tional capabilities can have a positive influence on post-acquisition
integration by reducing knowledge gaps, improving a firm’s adaptive-
ness, competitiveness, and performance (Jiménez-Jiménez & Sanz-
Valle, 2011). We discuss two aspects of organizational capabilities,
namely, organizational learnings and firm’s knowledge base. Organi-
zational 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
M. Iskandar-Datta and S. Shekhar Journal of Business Research 118 (2020) 240–252
242

learnings for integration success. Insider CFOs can also facilitate
smoother integration by employing knowledge base to achieve knowl-
edge transfer and assimilation of target firm's knowledge base and ex-
perience (Xie, Zou, & Qi, 2018). Knowledge base can positively influ-
ence 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, pre-
occupied with their own projects and operating under greater perfor-
mance 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 environ-
ments (Moschieri & Campa, 2014), aiding efficiency and competitive-
ness (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.
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
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 char-
acteristics is gathered from Compustat. Executive compensation, suc-
cession, 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 edu-
cation. 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
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.
4. Methodology
To examine the relationship between CFO status and acquirer’s
operating performance, we use the following multivariate regression
model.
= + + +
+
+
+
+
Perf Insider CFO Controls
Acquirer Firm Controls
Deal Controls
( )
( )
( )
i t i i
i t
i t i t
, 1 0 1 2 3 4 7
, 1 8 11
, , 1
(1)
4.1. Dependent variable
Measures of acquisition success could include access to new mar-
kets, increased resource availability, profitability improvements and
efficiency gains through technological and competitive advancements.
In this paper, we employ profitability and efficiency gains as the per-
formance proxies. Perf
i,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, irepresents the com-
bined firm post acquisition, and trepresents 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 (Perf
i,t+2
).
4.2. Test variable
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.
M. Iskandar-Datta and S. Shekhar Journal of Business Research 118 (2020) 240–252
243

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 suc-
cessful 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 vari-
able Diversifying takes a value of 1 if the 2-digit SIC code of the acquirer
differs from the target, and 0 otherwise.
5. Results
5.1. Sample characteristics and univariate analysis
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
pairwise correlation coefficients between the controls and the depen-
dent variable, displayed in Table 2, show that the correlations among
the variables are not very high.
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 in-
sider 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 out-
sider 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.
5.2.1. 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
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 Insider
Mean Median SD N Mean Median SD N Mean difference
Asset ($ Bn) 8.755 1.362 25.625 1187 10.641 2.318 25.501 778 −1.886
MTB 2.171 1.574 2.342 1087 1.983 1.549 1.380 702 0.188*
R&D 0.060 0.035 0.071 722 0.048 0.025 0.069 448 0.012
***
SG&A 0.252 0.211 0.196 1026 0.238 0.181 0.226 632 0.014
Capex 0.049 0.034 0.054 1162 0.054 0.041 0.054 762 −0.005
**
Profitability 0.087 0.083 0.101 1186 0.085 0.084 0.110 776 0.003
Panel B. Insiders and outsiders – Deal characteristics and post-acquisition performance
Outsider Insider
Mean Median SD N Mean Median SD N Mean difference
Perf
t+1
0.028 0.019 0.090 8523 0.037 0.026 0.080 6641 −0.010
***
Perf
t+2
0.027 0.018 0.088 8173 0.037 0.026 0.078 6424 −0.010
***
Prod
t-1,t+1
−0.006 −0.009 0.222 8117 −0.011 −0.012 0.212 6376 0.005
Prod
t-1,t+2
−0.022 −0.022 0.246 7780 −0.028 −0.027 0.219 6162 0.006
Cash_Only 0.371 0.000 0.483 3714 0.365 0.000 0.481 2894 0.006
Pub_Tgt 0.164 0.000 0.370 3714 0.194 0.000 0.396 2894 −0.031
***
Rel_Size 0.044 0.006 0.106 3157 0.039 0.005 0.109 2439 0.005*
Diversifying 0.442 0.000 0.497 3714 0.458 0.000 0.498 2894 −0.016
5
Our results are robust to excluding the financial and utility sector firms.
M. Iskandar-Datta and S. Shekhar Journal of Business Research 118 (2020) 240–252
244