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Benefits of Control, Managerial Ownership, and the Stock Returns of Acquiring Firms

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  • R. Glenn Hubbard
  • Darius Palia

Abstract

This paper examines the effect of the benefits of corporate control to managers on the relationship between managerial ownership and the stock returns of acquiring firms in corporate control transactions. At low levels of managerial ownership, agency costs of equity (such as perquisite consumption) reduce the returns earned by acquirers. As the managerial stake in the acquiring firm increases, the interests of managers are more closely aligned with those of shareholders, reducing the acquisition premium. At sufficiently high levels of managerial ownership, managers value a reduction in the risk of their nondiversified financial portfolio. However, managers enjoy nonassignable private benefits of control at high levels of ownership which they are not willing to lose by selling their stake in the financial markets. These benefits of control are increasing in the managerial ownership stake and can lead to managers 'overpaying' even when they own a substantial fraction of the firm. Examining mergers that occurred during 1985 to 1991, we find evidence of such a nonmonotonic relationship between the stock returns earned by acquirers and their managerial ownership level. Further, we find that acquiring firms with high levels of managerial ownership tend to diversify more than acquiring firms with low levels of managerial ownership.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5079.

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Date of creation: Apr 1995
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Publication status: published as Rand Journal of Economics, 26, (Winter 1995), pp. 782-792.
Handle: RePEc:nbr:nberwo:5079

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  1. Stulz, ReneM., 1988. "Managerial control of voting rights : Financing policies and the market for corporate control," Journal of Financial Economics, Elsevier, Elsevier, vol. 20(1-2), pages 25-54, January.
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Cited by:
  1. Bharadwaj, Anu & Shivdasani, Anil, 2003. "Valuation effects of bank financing in acquisitions," Journal of Financial Economics, Elsevier, Elsevier, vol. 67(1), pages 113-148, January.
  2. Offenberg, David, 2010. "Agency Costs And The Size Discount: Evidence From Acquisitions," Journal of Economics, Finance and Administrative Science, Universidad ESAN, Universidad ESAN, vol. 15(29), pages 73-93.
  3. Belot, François, 2010. "Excess control rights and corporate acquisitions," Economics Papers from University Paris Dauphine 123456789/5922, Paris Dauphine University.
  4. Offenberg, David, 2009. "Firm size and the effectiveness of the market for corporate control," Journal of Corporate Finance, Elsevier, Elsevier, vol. 15(1), pages 66-79, February.
  5. Renneboog, L.D.R. & Simons, T. & Wright, M., 2005. "Leveraged Public to Private Transactions in the UK," Discussion Paper, Tilburg University, Tilburg Law and Economic Center 2005-015, Tilburg University, Tilburg Law and Economic Center.
  6. Song, Moon H. & Walkling, Ralph A., 2004. "Anticipation, Acquisitions and the Bidder Return Puzzle," Working Paper Series, Ohio State University, Charles A. Dice Center for Research in Financial Economics 2004-15, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  7. Renneboog, L.D.R. & Simons, T., 2005. "Public-to-Private Transactions: LBOs, MBOs, MBIs and IBOs," Discussion Paper, Tilburg University, Tilburg Law and Economic Center 2005-023, Tilburg University, Tilburg Law and Economic Center.
  8. Carline, Nicholas F. & Linn, Scott C. & Yadav, Pradeep K., 2009. "Operating performance changes associated with corporate mergers and the role of corporate governance," CFR Working Papers 04-08, University of Cologne, Centre for Financial Research (CFR).
  9. Booth, James R. & Cornett, Marcia Millon & Tehranian, Hassan, 2002. "Boards of directors, ownership, and regulation," Journal of Banking & Finance, Elsevier, Elsevier, vol. 26(10), pages 1973-1996, October.
  10. Elitzur, Ramy & Halpern, Paul & Kieschnick, Robert & Rotenberg, Wendy, 1998. "Managerial incentives and the structure of management buyouts," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 36(3), pages 347-367, August.
  11. Bauguess, Scott W. & Moeller, Sara B. & Schlingemann, Frederik P. & Zutter, Chad J., 2009. "Ownership structure and target returns," Journal of Corporate Finance, Elsevier, Elsevier, vol. 15(1), pages 48-65, February.
  12. Cornett, Marcia Millon & Hovakimian, Gayane & Palia, Darius & Tehranian, Hassan, 2003. "The impact of the manager-shareholder conflict on acquiring bank returns," Journal of Banking & Finance, Elsevier, Elsevier, vol. 27(1), pages 103-131, January.
  13. Renneboog, Luc & Simons, Tomas & Wright, Mike, 2007. "Why do public firms go private in the UK? The impact of private equity investors, incentive realignment and undervaluation," Journal of Corporate Finance, Elsevier, Elsevier, vol. 13(4), pages 591-628, September.
  14. Shim, Jungwook & Okamuro, Hiroyuki, 2011. "Does ownership matter in mergers? A comparative study of the causes and consequences of mergers by family and non-family firms," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(1), pages 193-203, January.
  15. Benson, Bradley W. & Davidson III, Wallace N., 2009. "Reexamining the managerial ownership effect on firm value," Journal of Corporate Finance, Elsevier, Elsevier, vol. 15(5), pages 573-586, December.
  16. Andy Cosh & Paul Guest & Alan Hughes, 2007. "UK Corporate Governance and Takeover Performance," ESRC Centre for Business Research - Working Papers, ESRC Centre for Business Research wp357, ESRC Centre for Business Research.
  17. Basu, Nilanjan & Dimitrova, Lora & Paeglis, Imants, 2009. "Family control and dilution in mergers," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(5), pages 829-841, May.
  18. Louis, Henock, 2004. "Earnings management and the market performance of acquiring firms," Journal of Financial Economics, Elsevier, Elsevier, vol. 74(1), pages 121-148, October.
  19. Gao, Ning, 2011. "The adverse selection effect of corporate cash reserve: Evidence from acquisitions solely financed by stock," Journal of Corporate Finance, Elsevier, Elsevier, vol. 17(4), pages 789-808, September.

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