INDIANAPOLIS — As the CEO of a major company, if your initial reaction after a competitor wins an award is to undertake more intensive acquisition activities, you may want to think again.
A study recently accepted for publication in Strategic Management Journal considers the reaction of CEOs who have seen their competitors win awards from business media, but they themselves have not received an award.
Entitled “Ripple Effects of CEO Awards: Investigating the Acquisition Activities of Superstar CEOs’ Competitors,” the study is authored by Wei Shi, assistant professor of management at IU Kelley School of Business Indianapolis, and Yan Zhang and Robert E. Hoskisson, both of Rice University’s Jesse H. Jones Graduate School of Business.
“If your direct competitor for a job or a close peer wins something and you don’t, you very likely will compare yourself with that person, saying – ‘Okay, what can I do to get that?’” explained Shi. “Having these awards helps the winner dramatically increase social recognition. This creates a social comparison motivation, as the CEO compares himself or herself with the person who won.”
While these acquisitions may be good for the social status of the competitor CEO, researchers found the market reacts negatively to these particular acquisitions. Thus, Shi explains, it’s not in the best interest of shareholders or the firm when a CEO undertakes more acquisitions in the time period after not winning an award as these acquisitions could be driven by a CEO’s motivation to enhance social status instead of creating value for shareholders.
“Award winners’ competitors might have used acquisitions to increase their own social recognition and social status. Why acquisitions? Business media will write about them, and the firm will grow, increasing social recognition. But such acquisitions may not be in the interest of shareholders,” explained Shi.
Study authors say both shareholders and board directors can learn from the research. As a board director considers whether an acquisition is a good or bad move, he or she needs to look at the specific situation before approving it, explained Shi.
“When a CEO is proposing to do a deal, consider its timing,” Shi recommends to board directors. “If it’s right after the CEO’s peer wins an award, there may be some personal motives there that could have negative consequences for the firm.”
To read the study in its entirety, click here.
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The Indiana University Kelley School of Business has been a leader in American business education for more than 95 years. With over 107,000 living alumni and an enrollment of more than 10,500 students across two campuses and online, the Kelley School is among the premier business schools in the country. Kelley Indianapolis—based on the IUPUI campus—is home to a full-time undergraduate program and four graduate programs, including master’s programs in accounting and taxation, the Business of Medicine MBA for physicians and the Evening MBA, which is ranked 6th in the country by U.S. News & World Report. Learn more at kelley.iupui.edu.