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Agency problems in stock market‐driven acquisitions

Scott Fung (Department of Accounting and Finance, California State University, California, USA)
Hoje Jo (Department of Finance, Santa Clara University, Santa Clara, California, USA)
Shih‐Chuan Tsai (Department of Finance, Ling Tung University, Taipei, Taiwan)

Review of Accounting and Finance

ISSN: 1475-7702

Article publication date: 30 October 2009

3358

Abstract

Purpose

The 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/approach

Utilizing 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.

Findings

Market 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/value

The 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.

Keywords

Citation

Fung, S., Jo, H. and Tsai, S. (2009), "Agency problems in stock market‐driven acquisitions", Review of Accounting and Finance, Vol. 8 No. 4, pp. 388-430. https://doi.org/10.1108/14757700911006958

Publisher

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Emerald Group Publishing Limited

Copyright © 2009, Emerald Group Publishing Limited

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