IDEAS home Printed from https://ideas.repec.org/a/bla/jemstr/v15y2006i3p549-576.html
   My bibliography  Save this article

Synergies and Internal Agency Conflicts: The Double-Edged Sword of Mergers

Author

Listed:
  • Paolo Fulghieri
  • Laurie Simon Hodrick

Abstract

"This paper investigates the interaction between synergies and internal agency conflicts that emerges endogenously in multi-division firms. A divisional manager's entrenchment choice depends directly on the specificity of her division's assets, because the specificity governs whether entrenchment activities reduce the likelihood of her division being divested. The presence of synergies, by modifying the difference between the value of assets in their current use and in alternative uses, may alter the divisional manager's entrenchment incentive. In "the double-edged sword of mergers," synergy and internal agency effects are of opposite sign and merger gains may not be increasing in expected synergies. We characterize when divisions should optimally stand alone and when they should be part of a merged firm. We predict an absence of diversifying mergers in industries plagued by misdeployed assets, offer a novel explanation for the cross-sectional variation in postmerger valuation, and explain why mergers may be valuable "ex ante" while leading to successful divestitures ex post." Copyright 2006, The Author(s) Journal Compilation (c) 2006 Blackwell Publishing.

Suggested Citation

  • Paolo Fulghieri & Laurie Simon Hodrick, 2006. "Synergies and Internal Agency Conflicts: The Double-Edged Sword of Mergers," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(3), pages 549-576, September.
  • Handle: RePEc:bla:jemstr:v:15:y:2006:i:3:p:549-576
    as

    Download full text from publisher

    File URL: http://www.blackwell-synergy.com/servlet/useragent?func=synergy&synergyAction=showTOC&journalCode=jems&volume=15&issue=3&year=2006&part=null
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384, January.
    2. Robert Wilson, 1979. "Auctions of Shares," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 675-689.
    3. R. Preston McAfee & John McMillan, 1996. "Analyzing the Airwaves Auction," Journal of Economic Perspectives, American Economic Association, vol. 10(1), pages 159-175, Winter.
    4. Krishna, Kala, 1993. "Auctions with Endogenous Valuations: The Persistence of Monopoly Revisited," American Economic Review, American Economic Association, vol. 83(1), pages 147-160, March.
    5. Sandro Brusco & Giuseppe Lopomo, 1999. "Collusion via Signalling in Open Ascending Auctions with Multiple Objects and Complementarities," Working Papers 99-05, New York University, Leonard N. Stern School of Business, Department of Economics.
    6. McAfee, R Preston & Williams, Michael A, 1992. "Horizontal Mergers and Antitrust Policy," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 181-187, June.
    7. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-526, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kai Henning Blume, 2016. "Value-based management as a tailor-made management practice? A literature review," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 20(3), pages 553-590, September.
    2. Abraham L. Wickelgren, 2005. "Managerial Incentives And The Price Effects Of Mergers," Journal of Industrial Economics, Wiley Blackwell, vol. 53(3), pages 327-353, September.
    3. Habib, Michel A. & Mella-Barral, Pierre, 2013. "Skills, core capabilities, and the choice between merging, allying, and trading assets," Journal of Mathematical Economics, Elsevier, vol. 49(1), pages 31-48.
    4. repec:spr:scient:v:102:y:2015:i:3:d:10.1007_s11192-014-1495-0 is not listed on IDEAS
    5. Felipe Balmaceda, 2009. "Mergers and CEO Power," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 165(3), pages 454-486, September.
    6. Rao, T.V.S. Ramamohan, 2011. "CES as an Organizational Production Function," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 46(1), pages 69-81.
    7. Banal-Estanol, Albert & Macho-Stadler, Ines & Seldeslachts, Jo, 2008. "Endogenous mergers and endogenous efficiency gains: The efficiency defence revisited," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 69-91, January.
    8. Albert Banal-Estañol & Ines Macho-Stadler & Jo Seldeslachts, 2003. "Mergers, Investment Decisions and Internal Organisation," CESifo Working Paper Series 944, CESifo Group Munich.
    9. repec:kap:jtecht:v:42:y:2017:i:5:d:10.1007_s10961-016-9514-3 is not listed on IDEAS
    10. Inderst, Roman & Mueller, Holger M, 2006. "CEO Compensation and Strategy Inertia," CEPR Discussion Papers 5713, C.E.P.R. Discussion Papers.
    11. Pugliese, A. & Bezemer, P.J. & Zattoni, A. & Huse, M. & van den Bosch, F.A.J. & Volberda, H.W., 2009. "Boards of Directors’ Contribution to Strategy: A Literature Review and Research Agenda," ERIM Report Series Research in Management ERS-2009-013-STR, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    12. Rohner, Dominic, 2011. "Reputation, group structure and social tensions," Journal of Development Economics, Elsevier, vol. 96(2), pages 188-199, November.
    13. Albert Banal‐Estañol & Jo Seldeslachts, 2011. "Merger Failures," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(2), pages 589-624, June.
    14. Oliver Budzinski & Jürgen-Peter Kretschmer, 2009. "Horizontal Mergers, Involuntary Unemployment, and Welfare," Working Papers 90/09, University of Southern Denmark, Department of Sociology, Environmental and Business Economics.
    15. Frederik P. Schlingemann & Rene M. Stulz & Ralph A. Walkling, 1999. "Corporate Focusing and Internal Capital Markets," NBER Working Papers 7175, National Bureau of Economic Research, Inc.
    16. Billett, Matthew T. & Mauer, David C., 2000. "Diversification and the value of internal capital markets: The case of tracking stock," Journal of Banking & Finance, Elsevier, vol. 24(9), pages 1457-1490, September.
    17. Stefan Erdorf & Thomas Hartmann-Wendels & Nicolas Heinrichs & Michael Matz, 2013. "Corporate diversification and firm value: a survey of recent literature," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 27(2), pages 187-215, June.
    18. Budzinski, Oliver & Kretschmer, Jürgen-Peter, 2015. "Unprofitable horizontal mergers, external effects, and welfare," Ilmenau Economics Discussion Papers 96, Ilmenau University of Technology, Institute of Economics.
    19. Arnoud W.A. Boot & Anjolein Schmeits, 1996. "Market Discipline in Conglomerate Banks: Is an Internal Allocation of Cost of Capital Necessary as an Incentive Device?," Center for Financial Institutions Working Papers 96-39, Wharton School Center for Financial Institutions, University of Pennsylvania.
    20. Felipe Balmaceda, 2002. "Corporate Diversification: Good for Some Bad for Others," Documentos de Trabajo 141, Centro de Economía Aplicada, Universidad de Chile.
    21. Stefan Erdorf & Thomas Hartmann-Wendels & Nicolas Heinrichs & Michael Matz, 2012. "Corporate Diversification and Firm Value: A Survey of Recent Literature," Cologne Graduate School Working Paper Series 03-01, Cologne Graduate School in Management, Economics and Social Sciences.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jemstr:v:15:y:2006:i:3:p:549-576. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum). General contact details of provider: http://www.kellogg.northwestern.edu/research/journals/JEMS/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.