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This study investigates how acquiring and target firm managers' preferences for control rights motivate the payment for corporate acquisitions. We expect that managers of target firms who value inf luence in combined firms will prefer to receive stock. One reason top managers desire inf luence is to enhance their chances of retaining jobs in the combined firm. Our analysis shows a strong, positive association between managerial ownership of target firms and the likelihood of acquisitions for stock. We also find that managers of target firms are more likely to retain jobs in combined firms when they receive stock rather than cash.

The separate associations between financial leverage and valuation and between diversification and valuation have been widely researched. The joint function of leverage, diversification, and valuation, however, has received much less attention. Previous research shows that compared to specialized firms, diversified firms tend to have higher free cash flows and fewer high net present value investment opportunities. Consequently, the agency costs associated with potential overinvestment are greater for diversified firms. The literature also proposes that financial leverage should reduce agency costs. Consequently, we expect that the values of diversified firms increase with leverage. Our tests provide strong support for the hypothesis that the values of diversified firms increase with leverage. This tendency is not observed for specialized firms. Copyright Springer Science + Business Media, Inc. 2005debt, leverage, diversification, valuation,

This paper examines forecasts developed by financial analysts before and after mergers. The study finds that forecast accuracy decreases sharply after mergers. These accuracy reductions tend to be more pronounced when financial leverage changes, when the merger does not provide earnings or industry diversification, when the purchase method of accounting is used to record the transaction, when capital intensity changes, and when the size of the target corporation is large compared to the size of the acquiring corporation. The data also show that reductions in forecast accuracy after mergers tend to be temporary. Accuracy returns to approximately the premerger level within four years after the merger. The study also finds that overprediction bias increases sharply in the year immediately following the merger. This increase in over-prediction bias, however, is also temporary. Overprediction bias returns to approximately the premerger level within the four-year postmerger study period.

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