Agency problems in stock market‐driven acquisitions

Abstract

PurposeThe purpose of this paper is to examine the ways in which stock market valuation and managerial incentives jointly affect merger and acquisition (M&A) decisions and post‐M&A performance, and to provide new evidence on the agency implications where such acquisitions are driven by the stock market.Design/methodology/approachUtilizing all publicly‐traded US firms in the NYSE, AMEX and NASDAQ during the period from 1992 to 2005 (excluding financial and utility firms), obtained from COMPUSTAT, CRSP, I/B/E/S, and the M&A database provided by SDC Platinum, this paper adopts a two‐stage approach: the first stage, predicts the probability of an M&A based on the market valuation variables; the second stage, regresses the post‐M&A firm performance on the predicted probability of a merger or acquisition from the first stage and other control variables.FindingsMarket valuation has a significant influence on corporate acquisition decisions, particularly for those firms whose compensation packages include less managerial equity ownership, more executive stock options and no long‐term incentive plans, and in those firms where CEOs are serving on the board of directors. The value‐destroying acquisitions made by these types of managers are likely to be financed using the firms' stocks, executed with high premiums and undertaken during periods of high market valuation.Originality/valueThe main finding suggests that market‐driven acquisitions could be value destroying when managers engage in opportunistic acquisitions for reasons of self‐interest. Managerial myopia, overconfidence, misaligned incentives, empire‐building motives and poor corporate governance can all exacerbate the agency problem of market‐driven acquisitions.

Pengaruh Fee Audit, Rotasi Kap, Dan Reputasi Auditor Terhadap Kualitas Audit Di Bursa Efek Indonesia

“…Hal ini jarang sekali terdeteksi oleh perusahaan induk karena manajer perusahaan anak memiliki informasi lebih detil dan akurat mengenai kondisi perusahaan anak daripada yang dimiliki oleh pengambil keputusan perusahaan induk. Fung et al (2009) menemukan bukti bahwa akuisisi berbasis nilai pasar dapat memberikan informasi yang menyesatkan ketika manajer terlibat dalam akuisisi oportunistik demi alasan kepentingan diri sendiri. Sedangkan temuan lainnya, apabila tata kelola perusahaan bersangkutan kurang baik, maka akuisisi berbasis nilai pasar justru memperburuk masalah keagenan pihak pengakuisisi dengan terakuisisi.…”

Extraversion, individualism and M&A activities

“…Jensen and Meckling's (1976) study on agency theory, which considers corporate managers as rational economic agents whose personal interests differ from those of shareholders, may provide better explanation for the poor post-acquisition performance of acquiring firms. When corporate managers work for their selfinterest, the divergence between managers' self-interest and the interests of shareholders may lead to poor M&A decisions, which have negative effects on the benefits flowing to the shareholders of acquiring firms (Angwin et al, 2004;Beatty & Zajac, 1994;Fung et al, 2009;Lang et al, 1991;Morck et al, 1990;Parvinen & Tikkanen, 2007).…”

“…However, as mentioned previously, many empirical studies have documented the likelihood of negative returns for the shareholders of acquiring firms in the post-acquisition period. The poor outcomes for shareholders in acquiring firms are the consequences of rational choices made by corporate managers with the primary objective of maximizing their personal benefits (Angwin, Stern, & Bradley, 2004;Beatty & Zajac, 1994;Fung, Jo, & Tsai, 2009;Lang, Stulz, & Walkling, 1991;Morck, Shleifer, & Vishny, 1990;Parvinen & Tikkanen, 2007). Rossi and Volpin (2004) investigated how the external business regulatory environment, which protects shareholders' interests from mismanagement or malpractice by corporate managers, affects the intensity of a country's M&A activities.…”

Voluntary disclosure volume: Evidence from acquiring firm's press releases during M&A

“…This study investigates the factors that influence whether acquiring firms have a higher level of voluntary disclosure after they announce a proposed transaction. It is generally believed that the stock market plays an important role in corporate M&A decisions and mergers financed with stock are often motivated by stock overvaluation (Fung et al., 2009; Shleifer & Vishny, 2003). The literature has provided supporting evidence that a higher level of voluntary disclosure is more likely for stock‐financed mergers and is more likely as the economic importance of the deal increases at the deal announcement period (Amel‐Zadeh & Meeks, 2019; Dutordoir et al., 2014; Fraunhoffer et al., 2018; Kimbrough & Louis, 2011).…”