Well-Connected Chiefs Are Weak M&A Dealmakers, Study Says

Tracking deal flow using relationship capital management information supplied by the data firm BoardEx, CEOs with closer ties to other executives, board members, bankers and other market insiders were both more deal-prone and less likely to produce profitable combinations than less well connected chiefs, the study from Sam. M. Walton College of Business found.

Referencing a network of nearly 400,000 U.S. corporate officers and directors involving 776 deals, the researchers concluded that the transactions generally enriched the CEOs who launched them, while “destroying value” at the companies involved.

“As you might expect, an individual’s position in the social network matters,” said lead researcher Tomas Jandik, an associate professor of finance. “But this positioning doesn’t necessarily lead to financial gains for the firms they lead.”

He added, “We show that CEOs with higher network centrality—those who are highly connected socially—are more likely to pursue acquisitions, and that those deals are more likely to destroy value.”

The study found that highly-connected CEOs used their power and influence to launch deals more frequently. However, these mergers and acquisitions “generated mostly negative stock returns for the bidder firm’s shareholders and often lowered the combined value of the merged firms,” the study reported.

Well-connected CEOs are often able to control the flow of information well enough to fend off corporate governance mechanisms in place to prevent value deterioration, Prof. Jandik said.

The study is available on the Social Science Research Network and is forthcoming  in the Journal of Financial Economics.