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Conflicts of Interests Among Shareholders: The Case of Corporate Acquisitions

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  • Jarrad Harford
  • Dirk Jenter
  • Kai Li

Abstract

We identify important conflicts of interests among shareholders and examine their effects on corporate decisions. When a firm is considering an action that affects other firms in its shareholders' portfolios, shareholders with heterogeneous portfolios may disagree about whether to proceed. This effect is measurable and potentially large in the case of corporate acquisitions, where bidder shareholders with holdings in the target want management to maximize a weighted average of both firms' equity values. Empirically, we show that such cross-holdings are large for a significant group of institutional shareholders in the average acquisition and for a majority of institutional shareholders in a significant number of deals. We find evidence that managers consider cross-holdings when identifying potential targets and that they trade off cross-holdings with synergies when selecting them. Overall, we conclude that conflicts of interests among shareholders are sizeable and, at least in the case of acquisitions, affect managerial decisions.

Suggested Citation

  • Jarrad Harford & Dirk Jenter & Kai Li, 2007. "Conflicts of Interests Among Shareholders: The Case of Corporate Acquisitions," NBER Working Papers 13274, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:13274
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    1. Matvos, Gregor & Ostrovsky, Michael, 2008. "Cross-ownership, returns, and voting in mergers," Journal of Financial Economics, Elsevier, vol. 89(3), pages 391-403, September.
    2. Betton, Sandra & Eckbo, B Espen, 2000. "Toeholds, Bid Jumps, and Expected Payoffs in Takeovers," The Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 841-882.
    3. Lucian Bebchuk & Alma Cohen & Allen Ferrell, 2009. "What Matters in Corporate Governance?," The Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 783-827, February.
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    Cited by:

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    2. Purkayastha, Saptarshi & Veliyath, Rajaram & George, Rejie, 2022. "Type I and type II agency conflicts in family firms: An empirical investigation," Journal of Business Research, Elsevier, vol. 153(C), pages 285-299.
    3. Vicente, Cuñat & Luis, Garicano, 2010. "Did Good Cajas Extend Bad Loans? Governance, Human Capital and Loan Portfolios," MPRA Paper 42434, University Library of Munich, Germany.
    4. Bargeron, Leonce L. & Schlingemann, Frederik P. & Stulz, René M. & Zutter, Chad J., 2008. "Why do private acquirers pay so little compared to public acquirers?," Journal of Financial Economics, Elsevier, vol. 89(3), pages 375-390, September.
    5. Bethel, Jennifer E. & Hu, Gang & Wang, Qinghai, 2009. "The market for shareholder voting rights around mergers and acquisitions: Evidence from institutional daily trading and voting," Journal of Corporate Finance, Elsevier, vol. 15(1), pages 129-145, February.

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    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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