NBER Attention Getters

Do Target CEOs Sell Out their Shareholders to Keep Their Job in a Merger?

CEOs have a potential conflict of interest when their company is acquired: they can bargain to be retained by the acquirer and for private benefits rather than for a higher premium to be paid to the shareholders. We investigate the determinants of target CEO retention by the acquirer and whether target CEO retention affects the premium paid by the acquirer. The probability that a CEO is retained increases with a private bidder, the performance of the target, and with the fraction of target shares held by insiders. Regardless of the bidder type, we find no evidence that the premium paid is lower when the CEO is retained by the acquirer. Strikingly, the target stock price increases more at the announcement of an acquisition by a private firm when the CEO is retained than when she is not. This result holds whether the private acquirer is a private equity firm or an operating company and for management buyouts.

At first, I was surprised by this result, but perhaps not bargaining with the acquirer for greater private benefits is why they get to keep their jobs in the first place. If you were buying a new business, you would probably take how the management negotiates the acquisition as a signal of their future productivity on your behalf. If the management tries to do what is in the interest of the shareholders when it is counter to their self-interest, then those are the kind of people you would like to retain.

Implementing the New Fiscal Policy Activism (by Alan Auerbach)

To many observers, the current recession provides compelling circumstances for renewed fiscal policy activism. But the strong support for fiscal policy intervention reflects a renewed belief in policy activism that had already appeared before the present crisis. However, the recent debate about possible fiscal policy interventions suggests that we are still relying on the approaches to discretionary policy used in past periods of policy activism. It is not surprising that there have been few advances in discretionary policy design, given the lack of favor such policy suffered over many years. But if we are going to practice fiscal discretionary policy on a large scale, then more attention to policy design is sorely needed.

This is a very short, and easy to read paper. I thought he might point to new macro studies that explain the renewed lust for fiscal policy, but the interest is more in the policy arena, where he suggests 3 factors that seem to have played an important role in fiscal activism:

1. The weakening of automatic stabilizers due to the indexation of income taxes and reduction in marginal tax rates.
2. The "evolving" view that the Lucas critique is not absolute when there are nominal price rigidities or liquidity constraints.
3. The Fed's zero-nominal interest rate bound.