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The sources of value destruction in acquisitions by entrenched managers

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  • Harford, Jarrad
  • Humphery-Jenner, Mark
  • Powell, Ronan

Abstract

Prior work has established that entrenched managers make value-decreasing acquisitions. In this study, we determine how they destroy that value. Overall, we find that value destruction by entrenched managers comes from a combination of factors. First, they disproportionately avoid private targets, which have been shown to be generally associated with value creation. Second, when they do buy private targets or public targets with blockholders, they tend not to use all-equity offers, which has the effect of avoiding the transfer of a valuable blockholder to the bidder. We further test whether entrenched managers simply overpay for good targets or choose targets with lower synergies. We find that while they overpay, they also choose low synergy targets in the first place, as shown by combined announcement returns and post-merger operating performance.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 106 (2012)
Issue (Month): 2 ()
Pages: 247-261

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Handle: RePEc:eee:jfinec:v:106:y:2012:i:2:p:247-261

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Corporate governance; Mergers; Entrenchment; Blockholders; Overpayment;

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References

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Citations

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Cited by:
  1. Humphery-Jenner, Mark & Powell, Ronan, 2014. "Firm size, sovereign governance, and value creation: Evidence from the acquirer size effect," Journal of Corporate Finance, Elsevier, vol. 26(C), pages 57-77.
  2. Matthew D. Cain & David J. Denis, 2010. "Do Fairness Opinion Valuations Contain Useful Information?," Purdue University Economics Working Papers 1244, Purdue University, Department of Economics.
  3. Ishii, Joy & Xuan, Yuhai, 2014. "Acquirer-target social ties and merger outcomes," Journal of Financial Economics, Elsevier, vol. 112(3), pages 344-363.
  4. Hwang, Sunwoo & Kim, Woochan, 2011. "Managerial entrenchment of anti-takeover devices: quasi-experimental evidence from Korea," MPRA Paper 44030, University Library of Munich, Germany.

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