CEO tenure, boards of directors, and acquisition performance Bruce A. Walters a, ⁎ , Mark J. Kroll a,1 , Peter Wright b,2 a Department of Management and Information Systems, College of Administration and Business, Louisiana Tech University, PO Box 10318 Ruston, LA 71272, United States b Department of Management Fogelman College of Business and Economics, The University of Memphis, Memphis, TN 38152, United States Received 25 October 2005; accepted 28 November 2006 Abstract We explore the impact of CEO tenure on returns to shareholders arising from acquisition announcements. Further, we consider the value added for shareholders when the board of directors is composed in such a way as to enhance vigilance. In the absence of a vigilant board, CEO tenure is positively associated with performance at low to moderate levels of tenure, and negatively associated with performance when tenure further rises to substantial levels. In the presence of a vigilant board, however, shareholder interests can be advanced even at high levels of CEO tenure. © 2006 Elsevier Inc. All rights reserved. Keywords: Boards of directors; CEOs; Acquisitions; Agency theory Acquisitions have long-term consequences for employees, organizations, and industries, and they continue to increase in terms of global impact (nearly $1.95 trillion in 2004 [Hahn, 2005]). Key parties in an acquisition decision are the CEO and the board of directors. The CEO assesses acquisition targets, and formulates and implements acquisition strategy once the decision has been made. The board represents shareholders' interests, providing vigilance and expertise. Although CEO experience should benefit the decision process, prior research informs us that CEO effectiveness may in part be contingent on the length of CEO tenure (e.g., Audia et al., 2000; Hambrick and Fukutomi, 1991; Kiesler and Sproull, 1982; Kroll et al., 2000; Miller, 1990, 1993; Miller and Chen, 1994). We extend these concerns to the acquisition process, and argue that when boards are likely to be vigilant (i.e., comprised of independent outsiders, blockholders, and/or outside owners), they may positively influence the relationship between CEO tenure and performance. As CEO tenure advances, are specific board characteristics helpful in mitigating potential deleterious effects of CEOs' pursuit of personal interests at the expense of shareholders? This is an especially important question given that acquisitions continue to be popular while at the same time their performance is often less than desirable. In the remainder of the paper, we discuss how CEO tenure may affect shareholder returns arising from acquisition announcements at lower and higher levels of tenure, and offer a hypothesis as to the temporal effects of tenure on returns. Next, we introduce board vigilance, and offer hypotheses addressing the joint effects of vigilant boards and CEOs on acquisition performance as tenure advances. We then describe our sample construction and research methodology, report the results of our study, and present our discussion and conclusions. 1. Temporal effects of CEO tenure on returns to shareholders Whether they come from inside or outside the firm, new CEOs confront a steep learning curve, and acquire considerable vital, job-specific knowledge in the first two or three years in their positions (Harris and Helfat, 1997). Although CEOs ideally benefit from a “honeymoon period,” allowing them time to make mistakes and acquire job-specific knowledge and skills, Shen (2003) notes that many CEOs lose their jobs in less than three years, barely enough time to complete the process of taking charge (Gabarro, 1987). Zhang (2005) argues that quick Journal of Business Research 60 (2007) 331 – 338 ⁎ Corresponding author. Tel.: +1 318 257 3499; fax: +1 318 257 4253. E-mail addresses: bwalters@cab.latech.edu (B.A. Walters), mkroll@cab.latech.edu (M.J. Kroll), pwright@memphis.edu (P. Wright). 1 Tel.: +1 318 257 4012; fax: +1 318 257 4253. 2 Tel.: +1 901 682 4982. 0148-2963/$ - see front matter © 2006 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusres.2006.12.001