Sore Losers

Based on research by Yan Anthea Zhang, Robert E. Hoskisson (George R. Brown Emeritus Professor of Management) and Wei Shi 

• CEOs pursue acquisitions more aggressively after a close competitor wins a major award.
• CEOs launch acquisitions to recoup prestige and social acclaim – often to the detriment of shareholders.
• Acquisitions made by CEOs in the period after losing out on a major award generate lower returns than those made before executive awards are announced.

Everyone likes a prize. From gold stars for obedient children to national awards bestowed on business titans, research shows that positive reinforcement works. But what happens to those who don’t win?

A recent study by business school professor Yan Anthea Zhang and emeritus professor Robert E. Hoskisson, along with former Rice Business doctoral student and current professor at Indiana University, Wei Shi, concluded that awards competitions can actually harm companies when the CEO doesn’t win. And chances to lose are abundant: Media outlets such as Businessweek, Harvard Business Review and Forbes are just a few of the publications that run CEO competitions.

While the winners instantly earn celebrity status, the researchers found that the almost-winners yearn for what they did not get and chase public acclaim by making more and larger acquisitions. The effect on non-winning CEOs is even more pronounced if the competition is close.

To explain how this happens, the authors turn to social psychology. Behavioral influences, they argue, can lead to poor strategic decision-making. Social comparison theory, meanwhile, posits that humans instinctively judge our status relative to others with whom we identify. That’s not always bad. When individuals compare themselves to superior others, known as upward comparison, it can fuel the wish to improve.

But when the individuals are corporate leaders—by definition achievement-oriented and status-driven—the comparing can get out of hand. These leaders notice when someone else in their group wins acclaim.

So what is an overlooked CEO to do? The most straightforward option is to redirect resources to improving company performance. Financial results, after all, are at the heart of CEO competitions. But this approach takes time. Acquisitions, on the other hand, draw an instant spotlight. The bigger the firm, the greater the crowd of stakeholders—and more attention for the dealmaker. Acquisitions, in other words, are a fast track for a CEO who’s lost a competition and wants to save face.

The rise in acquisitions from a pre-award period to a post-award period shows the competitions’ effect. They were 8.2 percent higher than the rise in acquisitions for control groups. (The control groups were acquiring companies in industries that overlapped those of firms with competitor CEOs who didn’t win awards, but didn’t overlap those of firms whose CEOs were award winners). The value of those acquisitions after the awards period increased too: They were 70.9 percent higher than that seen among control firms.

That’s not to say the acquisitions were good choices. The scholars compared the value of firms in the days before, during and after an acquisition was announced, and on average, companies that lost an award saw a drop in the value of acquisitions they made after the competition period, compared to the value of acquisitions they made in the pre-award period.

What’s more, if the rivalry was really intense—especially if the CEOs knew each other—the negative effects of these acquisition decisions were worse.

To test this dynamic, the three professors used S&P 500 companies in ExecuComp, which supplies pay and demographic data on top managers, for the years 1996 through 2010. The sample group excluded firms headquartered outside the U.S. and only considered awards given out by major U.S. publications. After winner CEOs were identified, the researchers identified their close competitors: CEOs leading companies of a similar size and with a similar product portfolio. In most cases, they looked at acquisitions made during the periods four years before an award was given, and compared that to the four years after.

Board members, managers and shareholders may all want to take note. Spotting the negative effects of awards is crucial, since as in so much of life losers far outnumber the winners.

Nor are all awards are created equally. Failing to win the prestigious award from Businessweek (the magazine with the highest circulation) had a particularly triggering effect, prompting more CEOs’ acquisition activity than other awards.

While that’s little more than human nature in action, shareholders naturally expect a bit more than that to guide firm decisions. A simple question might help. Faced with a CEO proposing an acquisition, perhaps the board should ask first, “When was the last time you didn’t win an award?”

Yan Anthea Zhang is the Fayez Sarofim Vanguard Professor of Management in Strategic Management

Robert E. Hoskisson is the George R. Brown Emeritus Professor of Management at Jones Graduate School of Business at Rice University

To learn more, see: Shi, W., Zhang, Y. A., & Hoskisson, R. E. (2017). Ripple effects of CEO awards: Investigating the acquisition activities of superstar CEOs’ competitors. Strategic Management Journal, 38(10), 2080-2102.