Performance deviations and acquisition premiums: The impact of CEO celebrity on managerial risk‐taking

• Author: Sam Y. Cho,Jonathan D. Arthurs,David M. Townsend,Douglas R. Miller,Jeffrey Q. Barden
• Published date: 01 December 2016
• Date: 01 December 2016
• DOI: http://doi.org/10.1002/smj.2468

Strategic Management Journal

Strat. Mgmt. J.,37: 2677–2694 (2016)

Published online EarlyView 9 February 2016 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2468

Received 28 January 2012;Final revisionreceived 22 June 2015

PERFORMANCE DEVIATIONS AND ACQUISITION

PREMIUMS: THE IMPACT OF CEO CELEBRITY ON

MANAGERIAL RISK-TAKING

SAM Y. CHO,1*JONATHAN D. ARTHURS,1DAVID M. TOWNSEND,2

DOUGLAS R. MILLER,3and JEFFREY Q. BARDEN1

1Department of Strategy and Entrepreneurship, College of Business, Oregon State

University, Corvallis, Oregon, U.S.A.

2Department of Management, Pamplin College of Business, Virginia Tech,

Blacksburg, Virginia, U.S.A.

3Department of Management, School of Business, Virginia Commonwealth

University, Richmond, Virginia, U.S.A.

Research summary: This article draws on identity control theory and a study of acquisition

premiums to explore how CEO celebrity status and nancial performance relative to aspirations

affect rm risk behavior. The study nds that celebrity CEOs tend to pay smaller premiums for

target rms, but these tendencies change when prior rm performance deviates from the industry

average returns,t herebyleading these CEOs to pay higher premiums. The study also nds that the

premiums tend to be even largerwhen celebrity CEOs have more recently attained celebrity status.

Taken together, these ndings contribute to identity control theory and CEO celebrity literatures

by suggesting that celebrity status is a double-edged swordand that the internalization of celebrity

status by CEOs strongly inuences the decision-making of CEOs.

Managerial summary: The purpose of this article is to examine how CEO celebrity status and

nancial performance relative to aspirations affect the size of acquisition premiums. The study

nds that celebrity CEOs tend to pay smaller premiums for target rms. However, when celebrity

CEOs’ prior rm performance is either better or worse than the industry average, these CEOs pay

higher premiums. This situation is exacerbated when the CEO has only recently been crowned a

celebrity. In effect, these CEOs feel greatpressure to match the inated performance expectations

that come with celebrity status. These ndings suggest that being a celebrity is a double-edged

sword. The implication here is that CEOs who have recently been crowned a celebrity should be

aware of these pressures and cope accordingly. Copyright © 2015 John Wiley & Sons, Ltd.

INTRODUCTION

According to Thompson Financial data, acquisi-

tions have rapidly grown in frequency, size, and

strategic importance over the past few decades.

Evidence suggests, however, that acquisitions often

do not enhance acquirers’ rm value over the

Keywords: CEO celebrity; identity control; loss aversion;

self-protection; aspiration

*Correspondence to: Sam Y. Cho. Department of Strategy and

Entrepreneurship, College of Business, Oregon State Univer-

sity, 443 Austin Hall, Corvallis, Oregon 97331, U.S.A. E-mail:

sam.cho@oregonstate.edu

Copyright © 2015 John Wiley & Sons, Ltd.

short-term or long-term (Hayward and Hambrick,

1997). Acquisition price premiums— the price that

a buyer pays in excess of the prevailing mar-

ket value of a rm— constitute a signicant fac-

tor inuencing the overall acquisition performance

(Haunschild, 1994), and can vary widely (e.g.,

Sirower, 1994). Consequently, business leaders and

researchers are interested in understanding the

determinants of acquisition price premiums.

Existing research identies multiple determi-

nants of acquisition premiums, including supply

and demand for acquisition targets (e.g., Giliberto

and Varaiya, 1989), knowledge asymmetries

2678 S. Y. Cho et al.

between acquiring rms and other investors (e.g.,

Laamanen, 2007), resource characteristics of

acquiring rms and target rms (Makri, Hitt, and

Lane, 2010), board characteristics and links (e.g.,

Haunschild, 1994), acquiring rms’ performance

(e.g., Kim, Haleblian, and Finklestein, 2011), and

chief executive ofcer (CEO) characteristics (Hay-

ward and Hambrick, 1997; Roll, 1986). Consistent

with the latter explanation, this study builds on

emerging research on celebrity CEOs— CEOs

whom “experts have anointed as a star performer”

(Wade etal., 2006: 644) — to suggest that CEO

celebrity could play an important role in deter-

mining acquisition premiums. However, given the

complexity of price premium determinants, the

way CEO celebrity plays a role is not clear. Indeed,

celebrity CEOs may be willing to pay higher premi-

ums because they are overcondent in their ability

to make effective strategic decisions (Hayward,

Rindova, and Pollock, 2004). Celebrity CEOs may

also be willing to pay higher premiums because

they have excessively high internal aspirations and

external expectations with respect to consistent

superior performance. On the other hand, celebrity

CEOs may pay lower premiums because they want

to preserve their celebrity status and the benets

that go with it. Given the theoretical tension among

these explanations, an empirical study that helps

disentangle the effects of these mechanisms linking

CEO celebrity to acquisition price premiums could

contribute to both the literature on acquisition

performance and the literature on CEO celebrity.

We take up the challenge of examining the inu-

ence of CEO celebrity on acquisition price premi-

ums. We argue that the direct, negative effects of

CEO celebrity on acquisition price premiums over-

whelm potential positive inuences. At the same

time, we argue that, consistent with behavioral deci-

sion research, the impact of the internalization of

celebrity status by CEOs hinges on the extent to

which the acquiring rm’s prior nancial perfor-

mance deviates from industry average performance.

Specically, ceteris paribus acquiring rms with

celebrity CEOs tend to pay smaller price premi-

ums, but tend to pay higher premiums when they

have been performing either exceptionally poorly

or exceptionally well. We argue that as prior per-

formance deviates negatively from industry perfor-

mance, the desire to protect identity and celebrity

status stimulates substantial risk-taking by celebrity

CEOs. We also argue that as prior performance

deviates positively from industry performance, high

aspirations inherent in celebrity CEO status induce

signicant risk-taking by celebrity CEOs. Finally,

we argue that these direct and moderating effects

dissipate over time after the CEO achieves celebrity

status. Thus, a CEO’s celebrity status appears to

impact risk-taking most signicantly when recently

anointed star CEOs are inuenced by substantial

performance pressures owing to identity-control

mechanisms utilized to protect and bolster celebrity

status. Hence, our central contribution points to the

fact that celebrity status is indeed a “double-edged

sword” so that in addition to inuencing the social

judgments of external stakeholders (Wade etal.,

2006: 647), the internalization of celebrity status

into a CEO’s identity can produce both positive and

negative outcomes for the organization by inuenc-

ing the star CEOs’ decision-making. An analysis of

392 acquisitions across 45 two-digit SIC industries

between 1988 and 2000 conrms these arguments.

THEORY AND HYPOTHESES

Celebrity CEOs, identity, and internalization

of social status

Celebrity is a unique form of social status that is

conferred on CEOs by their peers (Malmendier and

Tate, 2009). Those with high social status such as

celebrity CEOs are thought to be more capable as

strategic actors, and deserving of the accolades and

remuneration they receive by virtue of their social

status (Grafn et al., 2013; Merton, 1968). In turn,

this positive external assessment is internalized into

the CEO’s identity given the salience of the award

(Stryker, 2008).

Identity theory “ …describes the ability of the

human self to become reexively aware of itself

through interactions with other people” (Mead,

1934; Powell and Baker, 2014: 1407). Hence,

one’s concept of self evolves in relation to the

surrounding social environment and the social

position one holds within these settings (Stryker,

1980). To preserve and sustain salient identities

over time, individuals utilize identity control mech-

anisms to create internalized meanings to guide the

actions of individuals in “a continuous process of

afrmation and reafrmation in social situations”

(Owens, Robinson, and Smith-Lovin, 2010: 484).

According to identity control theory, these “identity

control” mechanisms incorporate four components:

identity standard — what an identity actually means

within a dened social context; perceptions of

Copyright © 2015 John Wiley & Sons, Ltd. Strat. Mgmt. J.,37: 2677–2694 (2016)

DOI: 10.1002/smj