Windfall gains, loss aversion, and the price of a deal: Target CEO equity risk-bearing and acquisition premiums

In this article, we depart from prior research, which has typically focused on the acquiring firm CEO, and adopt a behavioral agency perspective to examine how self-interested target CEOs’ equity wealth shapes acquisition premium decisions. We argue that deal-specific windfall gains upon the acquisition announcement trigger immediate upward shifts in CEOs’ reference points, heightening risk aversion and motivating value-preserving behavior. Using a sample of 435 acquisitions from 1994 to 2020, we find that larger windfall gains are associated with smaller increases in final acquisition premiums. The type of prospective wealth available to the CEO moderates this effect: organizational prospects, such as strong revenue growth, weaken the pull of loss aversion and encourage more aggressive bargaining, whereas personal prospects, such as post-acquisition retention, amplify loss aversion. Our findings highlight the behavioral consequences of sudden wealth shocks and reveal how different forms of prospective value shape target CEOs’ influence over acquisition outcomes.