No full-text available
To read the full-text of this research,
you can request a copy directly from the authors.
How managerial wealth affects the tender offer process
Abstract
We present empirical evidence on the relation between changes in managerial wealth and tender offer characteristics. Changes in managerial wealth resulting from a tender offer are negatively related to the likelihood of managerial resistance to a tender offer and positively related to the likelihood of tender offer success. We also document that the abnormal returns to tender offers are lower for hostile than for friendly offers if we control for the tender offer premium. Finally, we find that the top executive gains, whereas outside shareholders do not gain, from management's decision to resist the tender offer.
... Table C.3 (Appendix C) presents the marginal effects (evaluated at the mean for continuous, and at zero for binary variables) from the first stage probit regressions. The dependent variable is Contract, equal to one if the CEO has an employment contract as of the M&A announcement date and zero otherwise (equation (B.1)) 19 . We have included various variables shown in the literature that predicts a CEO contract 20 . ...
... We have included various variables shown in the literature that predicts a CEO contract 20 . 18 See, e.g., Yermack (1996Yermack ( , 2004 19 Including board characteristics reduces the sample size as RiskMetrics starts coverage on board data since 1996. Prior work (e.g., Coles et al., 2014) also shows that missing values for board busyness, TW co-option and female directors are more frequent than other attributes such as board size and independence. ...
... See Bebchuk et al. (2009),Cotter and Zenner (1994), andHarris (1990).17 Prendergast and Stole (1996) note that younger CEOs (those early in their career) are more aggressive, more likely to take greater risk, and rely more on personal belief in their decision-making. ...
This study analyses a hand-collected, unique dataset on chief executive officer (CEO) employment contract details for S&P 500 companies over the period of 1993–2005. To control for the sample selection issue associated with firms granting a CEO contract, the study estimates the Heckman Selection model. The study finds substantial heterogeneity in contract provisions and their impact on acquirer risk-taking in mergers and acquisitions (M&As). More specifically, contract provisions that provide job and compensation security and equity incentives appear to encourage valuable risk-taking. In contrast, bureaucratic type provisions (automatic contract renewals; lack of equity incentives) motivate risky but value-decreasing deals. Further, more refined definitions of just cause for dismissal enhance valuable risk-taking, possibly by reducing contract ambiguities and the resulting disputes, whereas just causes based upon personal conduct reduce valuable risk-taking. This paper shows how heterogeneous contract provisions reflect the optimal contracting process in a competitive market for CEO talent versus managerial power over complacent boards, highlighting the importance of understanding contract complexity and heterogeneity in designing efficient contracts to enhance shareholder value and achieve strategic corporate goals.
... Using inductive reasoning, Chatterjee argues that boards having higher equity holdings are more likely to act in the long-term interest of the shareholders and less likely to maximize the immediate gain for the shareholders. Walkling and Long (1984) show that the decision to resist a takeover is directly related to potential changes in personal wealth for the target management and directors (see also Cotter and Zenner 1994). The potential change in wealth is significantly lower when offers are contested than when offers are uncontested. ...
... In other words, senior managers who benefit the least from offers tend to oppose them, while those who benefit the most do not. Cotter and Zenner (1994) show that changes in the wealth of the target's management and directors have a positive impact on the success of tender offers. Thus, changes in top executive wealth have an impact not only on the initial managerial decision to resist a tender offer but also on the tender offer outcome. ...
The question of whether a “good” corporate board structure can optimize performance and minimize conflicts between managers and shareholders has been widely debated. Because mergers and acquisitions represent major managerial investment decisions that are subject to board scrutiny, the effectiveness of a board’s structure is especially visible in the context of corporate acquisitions. With that in mind, in this paper, we examine the abundant literature in the fields of strategic management, economics, and finance in order to identify which board attributes contribute to the ability of corporate boards to create value through mergers and acquisitions. In particular, we discuss the impact of four board attributes: (1) board independence, (2) board size and director-specific attributes, (3) board ownership and compensation, (4) multiple directorships. As a result of our analysis, we conclude that the impact of board attributes on shareholder wealth in mergers and acquisitions is specific to each firm. Therefore, board regulations that do not reflect a firm’s specific needs may in fact hinder the creation of a board that is capable of responding effectively to the firm’s unique needs and circumstances.
... Finally, Cotter and Zenner (1994) and Mikkelson and Partch (1989) document that executives with larger equity holdings are less likely to resist a proposed offer. One interpretation of this finding is that the gain on the CEO's existing equity holdings offset the expected loss from selling the firm. ...
... Consistent with the directors' incentives in a control contest, Cotter, Shivdisani, and Zenner (1997) find that targets with more independent boards receive higher takeover premiums. This suggests that directors' objectives in the takeover process could lead to 14 However, evidence suggests that when a control attempt is made, targets with higher managerial ownership put up less resistance and are able to obtain larger premiums (Cotter and Zenner 1994, Song and Walkling 1993, and Stulz, Walkling, and Song 1990) 15 Coates and Kraakman (2004) do find that the association between the option portfolio and the probability of being acquired is greater for low-risk than for high-risk firms. This is consistent with options having a greater value to the CEOs from selling the firm when firm risk, hence the value of the options from remaining independent, is low. ...
In this paper, I investigate the magnitude, determinants, and consequences of equity grants to target firm CEOs prior to acquisitions. Median equity grants to the target CEO are generally largest in the year before the acquisition, both relative to prior years and to a control sample with similar size, growth opportunities, and industry association. There is some evidence that equity awards are used to compensate the CEO for his expected loss from selling the firm, but no evidence that the CEO uses his power to obtain excessive equity. Equity grants are positively related to acquisition premiums for target firms that do not initiate the sale. Overall, the evidence suggests that equity awards to the target CEO reflect the CEO's and board's information and incentives relating to the upcoming acquisition consistent with shareholder wealth maximization within the market for corporate control.
... Cotter, Shivdasani, and Zenner (1997) find that a majority of outside directors enhance target shareholder gains. In addition, target shareholders obtain larger takeover premiums when institutional share ownership is high (Cotter and Zenner, 1994), and when top management has greater stock ownership (Song and Walkling, 1993). ...
... In the same regressions, the alleged rent extraction indicator exhibits coefficients that are statistically indistinguishable from zero, indicating that targets identified as rent extraction fail to negotiate higher premiums. In regressions (2) and (4) Cotter and Zenner (1994), targets with high institutional ownership obtain higher premiums during deal negotiations. ...
Managerial rent extraction is a non-trivial phenomenon during acquisitions: in a sample of 364 deals during 1999-2005, over one target CEO in four experiences compensation increases due to option grants received just before the acquisition while target shareholders suffer losses. Indeed, the top quartile of rent extraction CEOs pocket an average 19 million dollars from options granted prior to the acquisition while shareholders of rent extraction targets experience average abnormal returns of -36 percent during the three years ending just after the merger announcement. Rent extraction occurs in weakly governed companies. Targets exhibiting rent extraction are more likely to grant their CEOs lucrative options packages after starting negotiations with eventual acquirers, but less likely to negotiate higher premiums. Self-dealing CEOs benefit from stock option vesting periods and other restrictions that disappear when their firms are sold.
... Samuel Laryea (2011) created quality of tender documents in construction. Cotter and Zenner (1994) presented empirical evidence on the relation between changes in managerial wealth and tender offer characteristics. ...
A key problem of construction firms' management and economy is organization of effective participation in public tenders. The direct executor, who determines the price of the contract, may be interested in obtaining as many contracts as possible. It means that his strategic behavior in tender may be to undervalue each individual offer. At the same time, such a strategy can be a source of risk of project loss because the actual costs may be lower than the price of the contract won. The management of the construction organization is not interested in this. On the other hand, overpricing strategy may lead to a reduction in the number of contracts won, which may not seem effective either for the head or for the executor of such an organization. The article discusses whether the profits of a construction firm can increase by using a more precise method of calculating the estimated cost. The second question is-which staff of a construction firm will benefit from using such methods? The aim of this work is to test these hypotheses with the instrumentality of agent-based modeling. Profit values of construction firms were obtained by the computer simulation of the construction firms' strategic behavior in public tenders. Results of 1500 computer experiments are presented as a decision tree. It can be seen that when using a more precise method, construction firms win tenders almost two times less often. However, they incur losses many times less than with an inaccurate method. If a construction firm made a profit from the contracts won, the profit margin was almost always greater when using the more precise method. Moreover, the results of game-theoretic modeling are given. Values of the objective functions of the executor and head of the construction firm were obtained, taking into account the reward for contracts won and penalty for miscalculating the cost of work. It has been proved that using more precise methods for calculating the estimated cost is beneficial to both the head and the executor. It can be concluded that both hypotheses were confirmed and a precise method for calculating the cost increases the efficiency of a construction firm.
... Carraher, Gibson and Buckley (2006) gave his opinion that to maintain better performance in organization, it is a good way to reward employees according to their productive activities. Additionally, employees will do their activities willingly when they are confirmed that their performance will be praised with reward (Abdul Rashid et al., 2016;Cotter & Zenner, 1994). However, recent days in organizations, employees' both job performance and satisfaction respectively depend on direct and indirect financial payment (Sopiah, 2013). ...
This study is directed to concentrate on the practices of human resource management (HRM) in private enterprise as well as inspect the HRM practices affecting operational performance (non-financial). Survey questionnaire has been heading for collecting data from 120 staffs based on Random Sampling Technique working in three organizations to be specific Rahman Jute Spinners (Pvt.) Ltd., Jamuna Jute Industries Ltd. and North Bengal Golden Fiber & Diversified Jute Mills which are working under Bangladesh Jute Spinners Association (BJSA). Correlation Test, ANOVA Test and Regression Coefficient Test were done to bring out the outcomes of the study. The results uncovered that, noteworthy and satisfactory relationship exists among HRM functions (namely practices of recruitment and selection, assessment of performance, compensation and reward, training and development) and performance of operations. This study gives insight in terms of ensuring sustainable operational performance by practice these HRM practices which will ultimately accelerate the productivity of employees as well as private jute mills in Bangladesh.
... Agency theory suggests that the separation of ownership and control leads to conflicts of interest and information asymmetry between shareholders and managers. In response, shareholders attempt to prevent opportunistic behaviour among managers (e.g., overinvestment, perquisite taking, mergers and acquisitions, earnings management, laziness, and inappropriate compensation setting) through incentive mechanisms and restrictions (Jensen, 1986;Cotter and Zenner, 1994;Bebchuk and Fried, 2003;Xie et al., 2003). One corporate governance mechanism is to appoint independent directors to monitor management activities. ...
We examine the impact of independent directors’ reputations on executive pay-performance sensitivity. Using hand-collected data from listed Chinese companies from 2012 to 2017, we find a positive association between independent directors’ reputations and pay-performance sensitivity that is more pronounced in companies with less concentrated ownership. Further, the results show that reputable directors have a stronger influence on pay-performance sensitivity when they sit on a remuneration committee, are in state-owned enterprises, and are in companies with higher agency costs. Our results highlight the monitoring role of reputable independent directors in setting effective executive compensation contracts.
... First, prior literature shows that incumbent managers of a target firm have the means to increase the cost of an acquisition to the extent of making it unfeasible for the acquirer (e.g., Walkling and Long [1984], Cotter and Zenner [1994]). Managers often oppose takeovers out of concerns about losing their jobs or losing private benefits after the takeover. ...
This paper examines the effect of disclosure regulation on the takeover market. We study the implementation of a recent European regulation that imposes tighter disclosure requirements regarding the financial and ownership information on public firms. We find a substantial drop in the number of control acquisitions after the implementation of the regulation, a decrease that is concentrated in countries with more dynamic takeover markets. Consistent with the idea that the disclosure requirements increased acquisition costs, we also observe that, under the new disclosure regime, target (acquirer) stock returns around the acquisition announcement are higher (lower), and toeholds are substantially smaller. Overall, our evidence suggests that tighter disclosure requirements can impose significant acquisition costs on bidders and thus slow down takeover activity. This article is protected by copyright. All rights reserved
... To conserve space, the independent variables used are presented in the notes accompanying Tables 5 and 6. The selection of the independent variables follows previous studies on the determinants of M&A premium (Cotter and Zenner, 1994;Flanagan and O'Shaughnessy, 2003;Kaufman, 1988;Lang et al., 1989;Madura and Ngo, 2008;Schwert, 2000;Servaes, 1991;Walkling and Edmister, 1985). ...
We examine the extent to which bidders’ stock returns at acquisition announcements reflect the financing needs of the target firm. Using a sample of the United States mergers and acquisitions of a period starts in 1985 and ends in 2012, we find that bidders of financially constrained targets pay lower acquisition premiums and earn higher announcement period cumulative abnormal returns than bidders of unconstrained targets. The lower premium and positive stock market reaction are both sources of value for bidders’ shareholders. Our results contrast the findings of the literature that document an insignificant wealth transfer to bidder shareholders.
... To conserve space, the independent variables used are presented in the notes accompanying Tables 5 and 6. The selection of the independent variables follows previous studies on the determinants of M&A premium (Cotter and Zenner, 1994;Flanagan and O'Shaughnessy, 2003;Kaufman, 1988;Lang et al., 1989;Madura and Ngo, 2008;Schwert, 2000;Servaes, 1991;Walkling and Edmister, 1985). ...
We examine the extent to which bidders’ stock returns at acquisition announcements reflect the financing needs of the target firm. We find that bidders of financially constrained targets pay lower acquisition premiums and earn higher announcement period cumulative abnormal returns than bidders of unconstrained targets. The lower premium and positive stock market reaction are both sources of value for bidders’ shareholders. Our results contrast the findings of the literature that document an insignificant wealth transfer to bidder shareholders.
... In cases where executive stock options are terminated at the time of the LBO, we incorporate the payoff by computing the difference between the purchase price and the strike price. 9 The value of options represents a small fraction of managers' wealth, which is consistent with other studies that examine changes in insider wealth around tender offers and mergers (Cotter and Zenner, 1994;Hartzell et al., 2004). We then construct a measure of Relative Divestment by dividing Net Dollar Divestment by the dollar value of managers' pre-LBO holdings. ...
... The available empirical evidence on this issue is ambiguous: Betton and Eckbo (2000), for example, show that the presence of multiple potential bidders reduces the probability of success. But Cotter and Zenner (1994) show that competing bids increases the likelihood of success, and Walking (1985) and Holl and Kyriazis (1996) find no statistically significant effect. Although the substantial role of regulatory authorities makes multiple bids less likely to take place in the banking sector than in the non-financial sector, in our analysis we will control also for these. ...
The consolidation process which characterized the banking industry in the last decades has been widely analyzed, but very few studies have investigated the reasons which bring a number of announced deals to failure. We fill this gap in the literature analyzing the characteristics of failed M&A operations in a large sample, including all the major domestic and cross-border deals in the banking sector announced worldwide between 1992 and 2010. The results show that the most important factors which determine the failure of an announced operation are deal specific characteristics, in particular the hostility of the bidder and the presence of multiple potential acquirers. Moreover, lengthier negotiations have a lower probability of success. Contrary to expectations, cross-border operations are more likely to be successfully completed than domestic ones.
... Since integration of a relatively large target in the course of a merger is likely to accentuate the internal power struggle over capital allocation, we expect a negative relationship between RELSIZE and abnormal returns. Cotter and Zenner (1994) document that abnormal returns are lower for hostile compared with friendly mergers, controlling for size (market value of equity), ownership factors, and other characteristics of the offer (e.g., whether there are multiple bidders). Consequently, we incorporate the variable ATTITUDE (hostile, neutral, or friendly) into our estimation. ...
... The seller's perspective is usually depicted as reactive and price-driven. Typically, the target's shareholders are assumed to sell shares when an attractive premium is offered, and management may resist if changes in their wealth are not satisfactory (Cotter & Zenne, 1994). ...
PurposeThe chapter looks at two recent acquisitions by Chinese companies of German firms operating in the automotive sector. In both cases it was the target firm that initiated the process, intentionally selling to a Chinese strategic investor. The main purpose of the chapter is to examine the main motivations that induce developed country MNEs to deliberately search for a buyer in China.
MethodologyThe chapter uses a case-study approach. Interviews were conducted with the managers that followed the entire process of sale and who were responsible for the search and the selection of a strategic investor in China.
FindingsEmpirical findings show that major drivers in opting for Chinese investors are the potential synergies generating from resource redeployment, the ability of the acquired firm to maintain its autonomy and the opportunity to expand into the Chinese market.
Research implicationsThe cases analysed show that developed country firms may take a proactive role in China in order to address their institutional-based disadvantages and to reduce and eliminate the liability of foreignness they may confront there. What is important is strong core competitiveness on their side, which can ensure their operational autonomy, such as technological leadership and superior quality and solid development. The policy implications are relevant, because in the current particular situation where many companies in Europe turn for sources of capital to emerging market firms, Chinese investors can facilitate target companies’ growth, with a positive impact for the local economy.
... Stulz (1988) argues that as managerial ownership increases, the probability that a firm is target of a takeover bid decreases while premium increases. On the contrary, empirical evidence in Mikkelson and Partch (1989) and Cotter and Zenner (1994), suggests that the greater ownership by target managers leads to lower resistance and greater probability of a firm being acquired. Since incentives of outsider directors are also related to their ownership, I control for that as well. ...
Incentives of executives and board of directors play an important role in corporate decisions. Principal agent theory suggests a tradeoff between risk and incentives in optimal compensation contracts for managers. The first essay of this dissertation explores the relationship between the distribution of incentive compensation among top executives and firm risk. This essay develops and tests a two-agent model of optimal incentive compensation for corporate executives. The model investigates the effects of firm risk and cooperation among executives in the design of incentive contracts and offers two contrasting propositions: 1. When importance of cooperation is invariant to risk, the ratio of incentive compensation of the CEO to that of other top executive(s) increases with risk. 2. In contrast, when importance of co-operation increases with risk, the ratio of incentive compensation first increases and then decreases with risk. Using EXECUCOMP data from 1992 to 2002 I test these propositions and find evidence supporting the second proposition, but none for the first.The second essay examines the relation between board independence of target firms and the returns to targets and acquirers around takeover announcements. Using a sample of 232 large relative size takeovers, I reexamine whether target board independence is related to target or acquirer returns and their share in the total wealth change around announcements. Unlike Cotter et al. (1997), I do not find independent target boards to be associated with higher target premiums or lower acquirer returns. Similar to Wulf (2004), I find that target returns are lower when target CEOs obtain CEO positions in the merged firm. However, target board independence does not mitigate the lower premium targets receive when their CEOs are CEOs of the merged firm. I conclude that the takeover market is competitive such that target board independence is unrelated to gain sharing between targets and acquirers in larger relative size takeovers.
... Significant ownership shares make takeover bids difficult to resist (Walkling and Long 1984;Jennings and Mazzeo 1993;Cotter and Zenner 1994) and increase the probability of bid success (Walkling 1985;Hirshleifer and Titman 1990). Indeed, the larger the toehold, the less shares need to be acquired to acquire control of the target, resulting in a higher probability of bid success (Eddey 1991). ...
This thesis deals with voluntary disclosure of information during takeover bids. It consists of three articles that are concerned with a different step of the disclosure process in this context. The first article aims at explaining the voluntary disclosure decision of target companies by studying factors influencing disclosure during such transactions. The results highlight that this decision is mainly explained by the influence of contextual factors. The second article identifies, through a lexical analysis of voluntary press releases, the discourse strategies adopted by both bidding and target companies and the underlying motivations. Finally, in the third article, an experiment is conducted to investigate the influence of disclosure and impression management strategies of the targets of hostile bids on shareholders. It turned out that these strategies modify their perception of the bid and ultimately their decision to accept or reject the bid.
... Because of its large size and lack of connection to performance, golden parachutes may create perverse incentives for the CEOs to make decisions that favor their own benefits at the expense of the shareholders. For example, overly attractive parachutes may incentivize CEOs to facilitate the sale of their companies at prices less favorable to their shareholders in order to obtain these rewards [Cotter and Zenner (1994)]. ...
... As standard in the literature, the premium is defined as the excess of the price paid for the target above its pre-acquisition market value four weeks (28 days) before the announcement date supplied by Thomson Financial (e.g. Cotter and Zenner, 1994). Four weeks allows for adequate time to avoid information leakage (Nathan and O'Keefe, 1989) and it is short enough to avoid contamination effects from other events (Flanagan and O'Shaughnessy, 2003). ...
Purpose
– The purpose of this paper is to examine the incentives of controlling shareholders in the market for corporate control. The author investigates the takeover premiums paid by a sample of European acquiring firms with voting rights structures that are highly concentrated. The results show a positive relationship between takeover premiums and the bidder’s concentration of both voting rights and excess voting rights over cash-flow rights. The author argues that with higher levels of entrenchment, takeover premiums reflect the private benefits of control which controlling shareholders in bidding firms seek to extract from a public transaction.
Design/methodology/approach
– This paper uses cross-sectional regression analyses to examine the relationship between takeover premiums and the extent to which bidding firm shareholders exert control as well as the arrangement which underlie this. The sample is composed by 210 deals. The data are collected from various databases (Thomson Financial’s Mergers and Acquisition; Faccio and Lang’s (2002); Datastream/Worldscope, LexisNexis).
Findings
– The premium paid in European M&A transactions is affected by the level of ownership exerted by the controlling shareholder. The results show premiums are positively and significantly associated with higher levels of voting rights, as well as, the level of separation of ownership and control when controlling shareholder ownership is low. Pyramiding structure seems to be the means of separation the most associated with takeover premiums.
Research limitations/implications
– This paper can be improved by other specifications. First, it would be interesting to analyze premiums paid by firms with dispersed ownership structure and to compare these premiums with those paid by firms with controlling shareholders. Second, the author suggests to examine whether a controlling shareholder occupy the seat of a CEO or a chairman. In these cases, the author assumes that the controlling shareholder can benefit from more discretion and can extract more private benefits. Third, the author suggests extending the sample period to 2007 at least to include the sixth wave. This wave was even more significant than the high-tech wave and has not been studied much. In these cases, the author assumes that the controlling shareholder can benefit from more discretion and can extract more private benefits.
Originality/value
– Previous studies show that the premium reflects the private benefits of control in privately negotiated transactions (mainly block transactions). In the present study, the author shows that the premium can also reflect private benefits in public merger transactions.
... Le possibili soluzioni ai costi di agenzia vanno ricercate principalmente: 1) negli incentivi manageriali, finalizzati a creare un legame tra la retribuzione dei managers e la performance di mercato dell'impresa; 2) nella payout policy e nella gestione del debito, come strumenti per distribuire liquidità, rispettivamente, agli azionisti e creditori, sottraendola ai managers 5 (Jensen, 1986;Berger et al., 1997); 3) nel CdA, attraverso la sua attività di monitoring del management. Sul punto 1) l'evidenza è contrastante: Morck et al. (1988) argomentano che la proprietà manageriale costituisce un fattore che protegge il manager dal rischio di essere sostituito, essendo correlata ad alcune variabili espressive del potere del top management quali, in particolare, lo status di socio-fondatore, una significativa rappresentanza nel consiglio di insiders, il diritto di voto in assemblea; Mikkelson, Partch (1989 e 1997); Shivdasani (1993); Cotter, Zenner (1994); Denis, Denis (1995); Denis et al. (1997) rilevano che nelle imprese in cui i managers detengono una significativa quota del capitale della società, la probabilità che dal market for corporate control provengano minacce di takeover è piuttosto ridotta. ...
Il presente studio analizza il legame esistente tra la rotazione degli amministratori delegati (AD) e diverse variabili, potenzialmente esplicative dell'abbandono della carica di un AD. L'indagine si con-centra sulle variabili di performance. Accanto ad esse vengono im-piegate le seguenti determinanti: struttura proprietaria; caratteristi-che personali dell'AD e composizione del Consiglio di Amministra-zione (CdA); tipo d'impresa. Il campione, costituito da un massi-mo di 218 società italiane e da un minimo di 134, è analizzato dal 1996 al 2002. Il turnover è: 1) spiegato meglio dalla performance contabile che da quella di mercato; 2) superiore nelle imprese a pro-prietà pubblica che in quelle a proprietà privata; 3) influenzato po-sitivamente dalla quota proprietaria degli azionisti di minoranza e 4) negativamente dalla presenza di patti di sindacato. [Codici JEL: G32; G34; J63; L14] 1. -Premessa Il processo di avvicendamento degli amministratori delegati costituisce, in alcuni casi, un fatto "naturale" del processo evolu-tivo della società, nel senso che avviene senza che alla base vi sia-no motivazioni direttamente collegate ai risultati dell'impresa. In 111 * <ottomor@alice.it>. L'Autore desidera ringraziare Daniela Venanzi, relatore della tesi di laurea, per i proficui suggerimenti che hanno contribuito al miglio-ramento del saggio, Barbara Fidanza per il supporto nella raccolta dati e i referee della Rivista di Politica Economica per le utili segnalazioni di approfondimenti ed estensioni allo studio. L'Autore rimane il solo responsabile di ogni eventuale erro-re o inesattezza.
... Han and Suk (1998) show that between abnormal returns at the announcement of stock splits and the level of insider ownership, there is a positive relationship. Also, Cotter and Zenner (1994) find that successful tender offer can have a connection with managerial ownership and it is associated with significant abnormal returns. ...
The current study reviews relationship between management ownership and firm performance with regard to empirical evidences. Although in the financial literature, management ownership is suggested for reduction of agency problem, there are contradictory view points on this suggestion. Some empirical studies show that increasing equities of managements can be responsible for better alignment of the monetary incentives between the managers and other equity owners. In contrast, other studies support the entrenchment argument hypothesis. The hypothesis stats that increasing of management's equity can contribute to reduce financial performance and may it creates control problem, when level of management ownership is high. In disputation between the incentive alignment and entrenchment argument, combined argument and Stultz's integrated theory arise. These arguments which are integrated by other arguments show that corporate performance is a non-monotonous function of management ownership. In spite of these arguments, some scholars believe that management ownership has a passive role in corporate governance, because of being a function of financial performance. However, others state that there is absolutely no relationship between management ownership and financial performance. In circumstances, perhaps a new combination of ownership alternative mechanisms can do work competently.
Las adquisiciones hostiles son un instrumento que permite disciplinar a los administradores, lo que redunda en una mejor gestión de la compañía. Así pues, conviene preguntarse, ¿cuál es el rol que deben adoptar los administradores en una operación no consensuada? El derecho colombiano implícitamente optó por la regla de pasividad de los administradores que prohíbe la adopción de medidas defensivas que pudiesen perturbar el normal desarrollo de una OPA. En el presente escrito, se indaga por la conveniencia de la solución escogida en el derecho colombiano y, a partir de ahí, se proponen ciertas pautas que permiten clarificar el alcance del deber de pasividad.
Over the last two decades there has been a notable increase in the number of corporate governance codes and principles, as well as a range of improvements in structures and mechanisms. Despite this, corporate governance failed to prevent a widespread default of fiduciary duties of corporate boards and managerial responsibilities in the finance industry, which contributed to the 2007–10 global financial crisis. This book brings together leading scholars from North America, Europe, Asia-Pacific and the Middle East to provide fresh and critical analytical insights on the systemic failures of corporate governance linked to the global financial crisis. Contributors draw from a range of disciplines to demonstrate the severe limitations of the dominant corporate governance framework and its associated market-oriented approach. They provide suggestions on how the governance problems could be tackled to prevent or mitigate any future financial crisis and explore new directions for post-crisis corporate governance research and reforms.
Purpose
This paper aims to analyze the inhibitory effect of non-controlling shareholders governance mechanism on the retention of self-interest management, which provides theoretical support and practical basis for standardizing the control transfer behavior of listed companies and improving the governance mechanism of non-controlling shareholders.
Design/methodology/approach
Taking A-share listed companies with control transfer from 2000 to 2017 as sample, this paper investigates the strategy, path and retention consequence of the target company’s market selected top management who collude with the new controlling shareholder to avoid the risk of being taken over by control transfer.
Findings
This research explores that negative earnings management behavior may reduce the real premium of control transfer after deducting the “shell value”. The lower the real premium of control transfer after deducting the “shell value”, the higher the probability of management retention after control transfer. This paper also reveals that the real premium of control transfer after deducting the “shell value” plays complete mediation role between the negative earnings management behavior of the management and their own retention. The mediation effect of “collusion and price reduction” in the control transfer will be inversely moderated by the governance mechanism of noncontrolling shareholders including the old shareholders of the seller.
Originality/value
This paper not only constitutes a supplement to the existing literature but also provides empirical evidence for standardizing the control transfer behavior of listed companies, and making good use of the old shareholders of the seller to improve corporate governance and alleviate agency conflict after control transfer.
Antitakeover provisions play a central role in corporate governance research. But there is little agreement over which, if any, provisions actually affect takeover likelihoods. In tests that account for the endogenous use of antitakeover provisions, we find that at most 11 of the 24 G-index provisions are negatively related to takeover likelihood. Various indices used in the literature measure takeover deterrence to the extent they include this subset of provisions. In more stringent tests, only four provisions are consistently and negatively related to takeover likelihood throughout the 1995–2020 period, while one provision (golden parachutes) is positively related to takeover likelihood.
This study investigates the governance effect of comment letters. Companies with severer information asymmetry are more likely to receive merger and acquisition (M&A) comment letters, which demonstrate a lower M&A success rate; however, such companies exhibit better long-term M&A performance. Further analysis shows that the long-term governance effects are stronger in cross-industry and cross-region samples and that the transmission channels are information disclosure and internal control quality of the inquired firms. This study enriches the literature on government regulation effectiveness, develops new evidence on the localisation of government regulation from developed economies, and provides policy implications for further regulation reform in transition economies.
Purpose
There is little known globally on the association among the independent shareholder, board size and merger and acquisition (M&A) performance. This paper addresses the global issue about cross-border M&A in banking sector, particularly exploring the role of difference in the independent shareholder and board size between acquirer and target banks on synergy gains based on the international study.
Design/methodology/approach
Based on cross-border bank M&As data on 59 deals from 1995 to 2009, we initially apply social network analysis techniques to explore the country connectedness of the acquirer-target banks in cross-border M&As. Ordinary least squares (OLS) with robust standard errors is further used to investigate synergy gains within the difference in the degree of bank independent shareholder and board sizes between the acquirer and target banks.
Findings
Our results indicate that the acquiring banks are generally interconnected with the targeted banks and that some of acquiring banks are clearly concentrated in Asian countries including China, Hong Kong, and Philippines. Moreover, we find that cross-border M&As with larger difference in independent shareholders between the bidder and target bank would result in higher synergy gains in all cases of takeover premiums on 1 day, 1 week and 4 weeks. In addition, financial differences between the bidder and target banks have a significant impact on synergetic gains, a topic not explored in previous studies. There is no evidence that institutional and governance differences between bidder and target bank have significant cross-border impacts on takeover premiums with respect to 1 day, 1 week and 4 weeks, respectively.
Originality/value
This paper contributes to the literature by exploring the international issue about the role of difference in the degree of bank independent shareholder and board sizes between acquirer and target banks on synergy gains. Based on bank cross-border M&As data on 59 deals from 1995 to 2009, we initially apply social network analysis to explore the country connectedness of acquirer-target bank in cross-border M&As, while ten ordinary least squares (OLS) with robust standard errors is used to investigate synergy gains within the difference in the degree of bank independent shareholder and board sizes between acquirer and target banks.
This study investigates the choice to obtain both financial advisory services and independent expert opinions during takeovers in Australia where these services are provided by independent firms. We find the use of both services increases when the target firm is offered a lower initial premium. We also document that engaging both services benefits target firm shareholders through a higher probability of a price revision and a greater likelihood of deal success. The results are robust to controlling for selection bias and suggest the use of both independent experts and financial advisors only adds value when different firms provide these services.
This book examines the effectiveness of corporate takeovers. Particularly, it identifies the extent to which the interests of shareholders and employees can be complementarily protected when a takeover is made. The dominant ideologies of corporate takeovers include synergistic gains and managerial disciplinary role. The UK Takeover Code is a regulatory response to the role of managers of target companies only. Also, the regulatory framework for takeovers in the United States is largely focused on target companies. Identifying the limitations of these regulatory framework, the book demonstrates that managements can influence the role of takeovers, thereby undermining its synergistic and disciplinary values.
The relevance of institutional control over the important role of managements is identified. Addressing the challenges of managerial influence over takeover functions is argued to be capable of promoting a complementary benefit to shareholder and employee interests, thereby challenging the shareholder and stakeholder primacy debate in corporate law, particularly in relation to takeovers.
This book will be essential reading for scholars and students interested in the market for corporate control, corporate law and company law.
Using a sample of U.S. domestic deals from 1990-2016, we find that bidders adjust the amount of premium paid in mergers and acquisitions (M&As) based on the levels of earnings management at target firms. However, the way a firm manipulates earnings upward matters: earnings management via real activities manipulation is more detrimental than discretionary accruals. As a result, target firms that engage in real earnings management receive lower premiums in M&As, while accruals management has no effect on premiums. Correspondingly, we find that the targets’ M&A announcement period cumulative abnormal returns are inversely related to their level of real earnings management, while the returns are not related to accruals management. Further analyses confirm that target shareholders' wealth is not driven solely by undervaluation, expected synergy and managerial hubris, but also reflect bidders’ perception of the target firms' earnings quality based on real earnings management.
Purpose
This paper evaluates the relation between acquisition premiums and amounts recognised as identifiable intangible assets in business combination, in periods before and after transition to IFRS.
Design/methodology/approach
Empirical archival research using data from business acquisitions.
Findings
In the pre-IFRS period there is evidence of firms recognising identifiable intangible assets in business combinations having higher acquisition premiums. This association of acquisition premiums and identifiable intangible assets ceased with transition to IFRS, notwithstanding the relative latitude provided in accounting standards for the recognition of identifiable intangible assets.
Research limitations/implications
This paper complements Su and Wells (2015) which finds little association between identifiable intangible assets and performance subsequent to business acquisitions prior to transition to IFRS. The results here suggest that is attributable to overpayment. Problematically, the incentives for opportunism remain and an issue requiring address is whether alternative sources of accounting flexibility in relation to business combinations exist, such as goodwill which is no longer subject to mandatory amortisation.
Practical implications
Our results are consistent with accounting opportunism, and suggests ‘overpayment’ and accounting flexibility having an economic consequence. This would be expected to result in asset impairments in subsequent periods, however there is little evidence of this occurring.
Originality/value
This paper complements a number of papers concerned with the recognition of identifiable intangible assets in business combinations and confirms what many researchers in the area typically assume (triangulation).
Many view large payments following mergers or acquisitions as excessive and evidence of rent extraction. Using additional disclosures required by the SEC since 2006, I hand‐collect details of preexisting change in control (CIC) provisions in employment agreements and CIC benefits granted to target CEOs during mergers. I find that CIC benefits are renegotiated in approximately 50 percent of my sample. I then investigate whether renegotiation of CIC benefits tends to be opportunistic, or, instead, evidence of efficient contracting. The overall evidence is more consistent with efficient contracting. This contrasts prior research that focuses solely on certain components of CIC benefits, such as employment in merged firms or merger bonuses. I find that changes in CIC benefits are positively associated with the CEO's horizon, as would be predicted by efficient contracting, but only limited evidence that changes in CIC benefits are positively associated with proxies for CEO power, as would be predicted by rent extraction. Acquiring firm shareholders interpret increases in target CEOs’ CIC benefits as evidence of rent extraction, although I find that the merged firm's post‐merger performance is positively associated with changes in CIC benefits. This result is more consistent with acquiring firms providing target CEOs increased CIC benefits to complete mergers and realize synergies than with value‐reducing rent extraction.
This article is protected by copyright. All rights reserved.
In Australia, a corporate acquisition can be structured as either a scheme of arrangement or a takeover. We investigate the association between deal structure and the retention of target directors on the merged entity board. We find that the odds of a target director subsequently sitting on the merged entity's board are significantly higher in schemes. The results also show that premiums are lower in schemes of arrangement when additional target directors are appointed to the board of the acquiring firm. The findings indicate that target director appointment is unrelated to the merged entity's post-acquisition performance.
This paper examines management’s motives for rejecting takeover bids and the associated shareholder wealth effects. We develop measures of initial bid quality and find a significant negative correlation between the quality of a bid and rejection. The likelihood of higher follow-on offers decreases with bid quality and is greater when targets have classified boards and chief executive officers (CEOs) with significant personal wealth tied to the transaction. Target CEOs who fail to close high-quality offers experience a significant rate of forced turnover. Overall, the results support a price improvement motive for contested bids.
In April 2004, the European Union promulgated the Takeover Directive, which each Member State had to adapt to its national regulations. Up to now, there has been a lack of empirical evidence regarding the effect of the transposition of this Directive on the performance of the market for corporate control. Furthermore, given that the changes introduced have not been the same throughout the countries, it is difficult to extract conclusions from aggregate studies. The aim of this paper is to analyse the Spanish case, trying to determine whether the protection of minority shareholders, one of the Directive’s main goals, has improved in relation to the previous national regulations, a matter that has not been studied from an economic viewpoint. More specifically, we will test whether there are significant changes in the main proxies of minority shareholder protection, i.e., the number of takeovers and the bid premiums, and whether any such changes are due to the changes in regulation, while controlling for other variables. The results seem to show that the European Directive has not contributed to increasing minority shareholder protection in Spain, neither by means of more takeovers, nor through higher bid premiums.
We examine the contribution of credit ratings in the information set that bidders use to price targets. Using a sample that includes U.S. domestic deals completed between 1986 and 2012, we find that the presence of ratings significantly affects the M&A premiums paid in mergers and acquisitions (M&As). M&A premiums paid are lower in deals involving rated as opposed to nonrated firms. Assuming that the presence of ratings mitigates the problem of information asymmetry and allows bidders to pay a fair price for a target, then the post-M&A performance of bidders of rated targets would be superior. Indeed, we find that the presence of ratings and bidders’ post-M&A operating performance are positively related.
This Article argues that once undistorted shareholder choice is ensured-which can be done by making it necessary for hostile bidders to win a vote of shareholder support-boards should not have veto power over takeover bids. The Article considers all of the arguments that have been offered for board veto-including ones based on analogies to other corporate decisions, directors' superior information, bargaining by management, pressures on managers to focus on the short-run, inferences from IPO charters, interests of long-term shareholders, aggregate shareholder wealth and protection of stakeholders. Examining these arguments both at the level of theory and in light of all available empirical evidence, the Article concludes that none of them individually, nor all of them taken together, warrants a board veto. Finally, the Article discusses the implications that the analysis has for judicial review of defensive tactics.
This Article develops an account of the role and significance of managerial power and rent extraction in executive compensation. Under the optimal contracting approach to executive compensation, which has dominated academic research on the subject, pay arrangements are set by a board of directors that aims to maximize shareholder value. In contrast, the managerial power approach suggests that boards do not operate at arm's length in devising executive compensation arrangements; rather, executives have power to influence their own pay, and they use that power to extract rents. Furthermore, the desire to camouflage rent extraction might lead to the use of inefficient pay arrangements that provide suboptimal incentives and thereby hurt shareholder value. The authors show that the processes that produce compensation arrangements, and the various market forces and constraints that act on these processes, leave managers with considerable power to shape their own pay arrangements. Examining the large body of empirical work on executive compensation, the authors show that managerial power and the desire to camouflage rents can explain significant features of the executive compensation landscape, including ones that have long been viewed as puzzling or problematic from the optimal contracting perspective. The authors conclude that the role managerial power plays in the design of executive compensation is significant and should be taken into account in any examination of executive pay arrangements or of corporate governance generally.
This study investigates variables that explain why bidding firms raise their offer price following a negative capital market reaction to a takeover announcement. We find that whilst an increasing number of blockholders restrains the pursuit of unprofitable takeovers, greater institutional ownership and takeover hostility increases the likelihood a bidder will raise their offer price. Multiple bidders and board independence are unrelated to an increase in takeover price. Inconsistent with agency theory, management ownership and free cash flow do not explain bidder actions.
This Article reconsiders the basic allocation of power between boards and shareholders in publicly traded companies with dispersed ownership. U.S. corporate law has long precluded shareholders from initiating any changes in the company's basic governance arrangements. Professor Bebchuk's analysis and his empirical evidence indicate that shareholders' existing power to replace directors is insufficient to secure the adoption of value-increasing governance arrangements that management disfavors. He puts forward an alternative regime that would allow shareholders to initiate and adopt rules-of-the-game decisions to change the company's charter or state of incorporation. Providing shareholders with such power would operate over time to improve all corporate governance arrangements. Furthermore, Professor Bebchuk argues that, as part of their power to amend governance arrangements, shareholders should be able to adopt provisions that would give them subsequently a specified power to intervene in additional corporate decisions. Power to intervene in game-ending decisions (to merge, sell all assets, or dissolve) could address management's bias in favor of the company's continued existence. Power to intervene in scaling-down decisions (to make cash or in-kind distributions) could address management's tendency to retain excessive funds and engage in empire-building. Shareholders' ability to adopt, when necessary, provisions that give themselves a specified additional power to intervene could thus produce benefits in many companies. A regime with shareholder power to intervene, Professor Bebchuk shows, would address governance problems that have long troubled legal scholars and financial economists. These benefits would result largely from inducing management to act in shareholder interests without shareholders having to exercise their power to intervene. Professor Bebchuk also discusses how such a regime could best be designed to address concerns that supporters of management insulation could raise; for example, shareholder-initiated changes in governance arrangements could be adopted only if they enjoy shareholder support in two consecutive annual meetings. Finally, examining a wide range of possible objections, Professor Bebchuk concludes that they do not provide a good basis for opposing the proposed increase in shareholder power.
This chapter surveys the recent empirical literature and adds to the evidence on takeover bids for U.S. targets, 1980–2005. The availability of machine readable transaction databases have allowed empirical tests based on unprecedented sample sizes and detail. We review both aggregate takeover activity and the takeover process itself as it evolves from the initial bid through the final contest outcome. The evidence includes determinants of strategic choices such as the takeover method (merger v. tender offer), the size of opening bids and bid jumps, the payment method, toehold acquisition, the response to target defensive tactics, and regulatory intervention (antitrust), and it offers links to executive compensation. The data provides fertile grounds for tests of everything ranging from signaling theories under asymmetric information to strategic competition in product markets and to issues of agency and control. The evidence is supportive of neoclassical merger theories. For example, regulatory and technological changes, and shocks to aggregate liquidity, appear to drive out market-to-book ratios as fundamental drivers of merger waves. Despite the market boom in the second half of the 1990s, the proportion of all-stock offers in more than 13,000 merger bids did not change from the first half of the decade. While some bidders experience large losses (particularly in the years 1999 and 2000), combined value-weighted announcement-period returns to bidders and targets are significantly positive on average. Long-run post-takeover abnormal stock returns are not significantly different from zero when using a performance measure that replicates a feasible portfolio trading strategy. There are unresolved econometric issues of endogeneity and self-selection.
Most extant studies consider golden parachutes as the totality of change-in-control payments. However, for the median CEO of firms listed in the S&P SmallCap 600 index in 2009, golden parachute payments are only 46% of total change-in-control compensation. We measure total change-in-control payments using newly available data for this sample. Our results show that the total payments to the departing CEO are estimated at 1.1% of market value (on average). We also show that newly earned compensation (as opposed to accelerated vesting of lagged incentive pay) makes up approximately half of total change-in-control payments for the median CEO, and these two components of severance pay are positively correlated (contrary to existing theory). Furthermore, change-in-control payments do not appear to impede takeover offers or affect takeover premiums. Total change-in-control payments are small on average, and boards seem to take care in negotiating these terms with incumbent CEOs so that change-in-control payments do not adversely affect the firm’s prospects in the takeover market.
To examine the role of executive compensation in corporate acquisition decisions, we compare executive compensation of firms undertaking large acquisitions to a control sample of non-acquirors. Before the acquisitions, we find a positive relation between firm size and compensation for executives of acquirors; we do not find such a relation for non-acquirors. This result suggests an ex ante expectation that larger firm size will result in larger managerial remuneration. Ex post, however, large acquisitions have a small positive effect on total compensation. When we separate good from bad acquisitions, we find that good acquisitions increase compensation, whereas bad acquisitions do not have a positive effect on compensation.
Of the motives that have been advanced to explain corporate acquisitions, the least explored is the acquisition of a target experiencing financial distress. This study addresses this void by examining whether target firm financial distress is related to takeover: attitude, premiums, payment method, competition and outcome. Despite inconsistent findings across our distress measures the tenor of the results suggest that distressed targets receive higher premiums and are less likely to be offered cash consideration. Additionally, takeover completion is lower and takeover competition higher for targets in financial distress. Financial distress does not influence whether a takeover is hostile or friendly.
The study attempts to develop a model for predicting corporate takeovers in India. The data comprises of 37 target companies and a matching sample of control companies for the period 1997–98 to 2000–01. The study reveals that the target companies generally show a lower profit margin and ROCE with liquidity concerns being predominant for such firms. Further, such companies are tow on gearing but exhibit high valuation ratios. The model used to predict acquisitions shows moderate rate of success in the Indian context. The study has strong implications for investors and shareholders, corporate raiders and target companies, investment bankers and the regulators.
Theory suggests that shareholders who own blocks of stock have a stronger incentive to invest in voting on corporate issues than nonblockholders. Our evidence indicates that institutional investors and other blockholders vote more actively on antitakeover amendments than nonblockholders, and opposition by institutions is greater when the proposal appears to harm shareholders. Our evidence suggests that institutions that are less subject to management influence, such as mutual funds, foundations, and public-employee pension funds, are more likely to oppose management than banks, insurance companies, and trusts, which frequently derive benefits from lines of business under management control.
Tender offers provide an ideal setting for the analysis of agency relationships since the best interests of the principal (target firm shareholders) and agent (target firm managers) are often in conflict. Moreover, the actions and stated rationale of target managers in resisting or not resisting tender offers are readily observable, and the size of the possible agency costs is great. This research provides direct empirical evidence on the relationship between managerial welfare and takeover bid resistance. Tests on a sample of cash tender offers provide support for the managerial welfare hypothesis. The existence or absence of bid resistance is found to be directly related to the personal wealth changes of the target firm's managers. The relationships between managerial actions and bid premium size, bidder nationality, conglomerate offers, and "ex post settling up" are also examined.
This paper analyzes the survival of organizations in which decision agents do not bear a major share of the wealth effects of their decisions. This is what the literature on large corporations calls separation of 'ownership' and 'control.' Such separation of decision and risk bearing functions is also common to organizations like large professional partnerships, financial mutuals and nonprofits. We contend that separation of decision and risk bearing functions survives in these organizations in part because of the benefits of specialization of management and risk bearing but also because of an effective common approach to controlling the implied agency problems. In particular, the contract structures of all these organizations separate the ratification and monitoring of decisions from the initiation and implementation of the decisions.
‘Antitakeover’ amendments are amendments to a corporation's charter that impede the ability of an ‘outsider’ to gain control of the firm. A number of individuals and institutions have onjected to such amendments on the grounds that they are not in the best interests of the shareholders of the firms that adopt them. This paper employs event-time methodology to investigate the impact of antitakeover amendments on the common stock prices of firms that adopt them. The results indicate that the announcement of such amendments is associated with a positive revaluation of stock price. Contrary to the concerns of their critics, we conclude that antitakeover amendments are proposed by managers who seek to increase the value of the firm and are approved by stockholders who share that objective.
Many large corporations have recently adopted antitakeover charter amendments which make the transfer of corporate control more difficult. This paper develops and tests competing theoretical explanations for the passage of these amendments. In one view, antitakeover provisions are adopted because incumbent management seeks job protection at stockholders' expense. The alternative hypothesis is that antitakeover provisions benefit stockholders, perhaps by extracting greater payment in exchange for corporate control. Although inconclusive, the evidence provides weak preliminary support for the hypothesis that antitakeover amendments are best explained as a device for managerial entrenchment.
This paper reviews much of the scientific literature on the market for corporate control. The evidence indicates that corporate takeovers generate positive gains, that target firm shareholders benefit, and that bidding firm shareholders do not lose. The gains created by corporate takeovers do not appear to come from the creation of market power. With the exception of actions that exclude potential bidders, it is difficult to find managerial actions related to corporate control that harm shareholders. Finally, we argue the market for corporate control is best viewed as an arena in which managerial teams compete for the rights to manage corporate resources.
This paper examines the relation between managerial ownership and the probability of being a target firm, and the impact of managerial ownership on target shareholder returns. The paper finds that targets have lower managerial ownership than either their industry counterparts or randomly selected nontargets. Managerial ownership is significantly lower in contested compared to uncontested offers, and in unsuccessful compared to successful cases. Managerial ownership is significantly related to abnormal returns in contested cases that are ultimately successful. The results are consistent with a positive impact of managerial ownership where it is used to negotiate, but not ultimately block, an acquisition.
This research develops and tests a model for the prediction of tender offer outcomes. Variables that increase the supply of "obtainable shares" (such as increased bid premiums or the payment of solicitation fees ) are shown to increase the probability of success. Increased ownership of target firm shares by the bidder also incease the probability of success. Variables that impede the tendering of hares (such as target management opposition or a competing bid) decrease the probability of success. Tests of the model utilizing both linear and logistic analysis support the theoretical constructs and help resolve the paradoxical findings of previous research.
This paper examines empirical evidence about the effect of poison pill takeover defenses on shareholder wealth. I find evidence that announcements of the most restrictive forms of the pill defense are associated with stock price declines. Also, the most restrictive forms of the pill defense are associated with abnormally high rates of defeat of unsolicited tender offers. Although this evidence is consistent with managerial entrenchment, the evidence implies that, on average, poison pill defenses have seemingly had only a modest effect on firm valuation.
The paper provides evidence that tax attributes of target firms are significant in explaining the abnormal returns to shareholders of both target and acquiring firms following acquisition announcements. The most prominent tax attribute in tax-free acquisitions is the amount of net operating loss carryforwards and tax credits due to expire. The most important tax attribute in taxable acquisitions is the step-up in the acquired assets' basis. The findings also suggest that tax considerations motivate acquisitions. Specifically, obtaining tax-free status for the proposed acquisition increases its likelihood of completion.
This paper presents evidence that stockholder wealth declines on average when managers respond to attempted hostile takeovers with defensive changes in asset and ownership structure. The data also indicate that these corporate restructurings are typically quite large and that many are attempts by managers to create barriers specific to the hostile bidder and /or to consolidate a block of voting securities in the hands of management allies. The evidence suggests that defensive motives (whether beneficial or harmful) influence corporate asset and ownership structure.
In contrast to the negative average abnormal returns accompanying the announcement of a public offering of securities, the announcement of a private sale of equity is accompanied by a 4.5% average abnormal return. Cross-sectional analysis indicates that the change in firm value at the announcement of a private sale is strongly correlated with the resulting change in ownership concentration. This relation depends on the level ownership concentration after the sale and the purchaser's current or anticipated future relationship with the firm.
Abnormal returns earned by target firms at the time of initial acquisition announcements are related to form of payment, degree of resistance, and type of offer. Results indicate that interdependence among these characteristics is important. Previous research suggests that tender-offer targets earn higher abnormal returns than merger targets. After controlling for payment method and degree of resistance, however, the difference in abnormal returns between tender offers and mergers is insignificant. Resisted offers are associated with insignificantly higher returns than unresisted offers. Abnormal returns associated with cash offers are significantly higher than those associated with stock offers.
This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears these costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.Adam Smith, The Wealth of Nations, 1776, Cannan Edition(Modern Library, New York, 1937) p. 700.
Carl Icahn, Irwin Jacobs, Carl Lindner, David Murdock, Victor Posner, and the late Charles Bluhdorn are usually portrayed as corporate ‘raiders’. The evidence here, however, shows that between 1977 and 1982 when it was first announced that they had purchased stock in a given firm, stock prices on average increased significantly. The investors' activities in target firms for the two years following the initial stock purchase are likewise inconsistent with ‘raiding’. We discuss two hypotheses that are consistent with the evidence: first, these investors improve the management of target firms; second, they are systematically able to identify under-priced stocks.
We investigate the relation between Tobin's Q and the structure of equity ownership for a sample of 1,173 firms for 1976 and 1,093 firms for 1986. We find a significant curvilinear relation between Q and the fraction of common stock owned by corporate insiders. The curve slopes upward until insider ownership reaches approximately 40% to 50% and then slopes slightly downward. We also find a significant positive relation between Q and the fraction of shares owned by institutional investors. The results are consistent with the hypothesis that corporate value is a function of the structure of equity ownership.
We investigate the relationship between management ownership and market valuation of the firm, as measured by Tobin's Q. In a 1980 cross-section of 371 Fortune 500 firms, we find evidence of a significant nonmonotonic relationship. Tobin's Q first increases, then declines, and finally rises slightly as ownership by the board of directors rises. For older firms, there is evidence that Q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder.
Carl Icahn, Irwin Jacobs, Carl Lindner, David Murdock, Victor Posner, and the late Charles Bluhdorn are usually portrayed as corporate "raiders." The evidence here, however, shows that between 1977 and 1982 when it was first announced that they had purchased stock in a given firm, stock prices on average increased significantly. The investors' activities in target firms for the two years following the initial stock purchase are likewise inconsistent with "raiding." We discuss two hypotheses that are consistent with the evidence: first, these investors improve the management of target firms; second, they are systematically able to identify under-priced stocks.
The takeover boom that began in the mid-1980s has exhibited many phenomena not previously observed, such as hostile takeovers and takeover defenses, a widespread use of cash as a means of payment for targeted firms, and the acquisitions of companies ranking among the largest in the country. With the aim of more fully understanding the implications of such occurances, contributors to this volume consider a broad range of issues as they analyze mergers and acquisitions and study the takeoveer process itself.
The authors' estimates of the pay-performance relation (including pay, options, stockholding, and dismissal) for chief executive officers indicate that CEO wealth changes $3.25 for every $1,000 changes in shareholder wealth. Although the incentives generated by stock ownership are large relative to pay and dismissal incentives, most CEOs hold trivial fractions of the firms' stock, and ownership levels have declined over the past fifty years. The authors hypothesize that public and private political forces impose constraints that reduce the pay-performance sensitivity. Declines in both the pay-performance relation and the level of CEO pay since the 1930s are consistent with this hypothesis. Copyright 1990 by University of Chicago Press.
In a corporation with many small owners, it may not pay any one of them to monitor the performance of the management. We explore a model in which the presence of a large minority shareholder provides a partial solution to this free-rider problem. The model sheds light on the following questions: Under what circumstances will we observe a tender offer as opposed to a proxy fight or an internal management shake-up? How strong are the forces pushing toward increasing concentration of ownership of a diffusely held firm? Why do corporate and personal investors commonly hold stock in the same firm, despite their disparate tax preferences?
A common view of golden parachutes and shark repellents is that they are designed by management to insulate itself from the discipline imposed by the market for corporate control and so are harmful to shareholders. This paper offers an alternative view that these devicesare beneficial to shareholders because they allow better contracting between manager and shareholders. Evidence on the incidence of goldenparachutes and on the compensation-tenure relationship for managers of golden parachute firms supports the alternative view. Copyright 1986 by American Economic Association.
The primary aim of the paper is to place current methodological discussions in macroeconometric modeling contrasting the ‘theory first’ versus the ‘data first’ perspectives in the context of a broader methodological framework with a view to constructively appraise them. In particular, the paper focuses on Colander’s argument in his paper “Economists, Incentives, Judgement, and the European CVAR Approach to Macroeconometrics” contrasting two different perspectives in Europe and the US that are currently dominating empirical macroeconometric modeling and delves deeper into their methodological/philosophical underpinnings. It is argued that the key to establishing a constructive dialogue between them is provided by a better understanding of the role of data in modern statistical inference, and how that relates to the centuries old issue of the realisticness of economic theories.
We document managers' vote holdings in a large random sample of industrial firms, and test whether the degree of managerial control of shares affects how often a firm is the target of control events. The likelihood of successful acquisitions of firms is unrelated to managers' holdings. But this insignificant relation reflects two opposing effects. Lower managerial control is associated with a higher probability that a firm will receive a takeover offer, but a lower probability that a takeover attempt will lead to a change in control.
This paper tests hypotheses about the wealth effects of poison pill securities and hypotheses about the characteristics of firms that adopt them. Our estimates indicate that poison pill defenses reduce stockholder wealth by a statistically significant amount. We also find that firms that adopt poison pill defenses are significantly less profitable than the average firm in their industries during the year prior to adoption. Moreover, the managers of these firms hold statistically significantly smaller fractions of their own firms' stock than the average fraction held by managers of other firms in the same industries.
This paper analyzes how managerial control of voting rights affects firm value and financing policies. It shows that an increase in the fraction of voting rights controlled by management decreases the probability of a successful tender offer and increases the premium offered if a tender offer is made. Depending on whether managerial control of voting rights is small or large, shareholders' wealth increases or falls when management strengthens its control of voting rights. Management can change the fraction of the votes it controls through capital structure changes, corporate charter amendments, and the acquisition of shareholder clienteles.
This paper reviews much of the scientific literature on the market for corporate control. The evidence indicates that corporate takeovers generate positive gains, that target firm shareholders benefit, and that bidding firm shareholders do not lose. The gains created by corporate takeovers do not appear to come from the creation of market power. With the exception of actions that exclude potential bidders, it is difficult to find managerial actions related to corporate control that harm shareholders. Finally, we argue the market for corporate control is best viewed as an arena in which managerial teams compete for the rights to manage corporate resources.
This paper constructs a two-country (Home and Foreign) general equilibrium model of Schumpeterian growth without scale effects. The scale effects property is removed by introducing two distinct specifications in the knowledge production function: the permanent effect on growth (PEG) specification, which allows policy effects on long-run growth; and the temporary effects on growth (TEG) specification, which generates semi-endogenous long-run economic growth. In the present model, the direction of the effect of the size of innovations on the pattern of trade and Home’s relative wage depends on the way in which the scale effects property is removed. Under the PEG specification, changes in the size of innovations increase Home’s comparative advantage and its relative wage, while under the TEG specification, an increase in the size of innovations increases Home’s relative wage but with an ambiguous effect on its comparative advantage.
In the 1980s, the market for corporate control has been increasingly active, and the quantity of output of academic researchers studying corporate control questions has mirrored the market activity. This review examines the returns to bidders and targets, and the effects of defending against hostile takeovers.
This paper analyzes the relation between takeover gains and the q rations of targets and bidders for a sample of 704 mergers and tender offers over the period 1972-87. Target, bidder, and total returns are larger when targets have low q ratios and bidders have high q ratios. The relation is strengthened after controlling for the characteristics of the offer and the contest. This evidence confirms the results of the work by L. Lang, R. Stulz, and R. A. Walkling (1989) and shows that their findings also hold for mergers and after controlling for other determinants of takeover gains. Copyright 1991 by American Finance Association.
Golden parachutes, executive decision-making, and shareholder wealth An empirical investigation of the impact of 'antitakeover' amendments on common stock prices, Joulnal of Financial Economics Il
- Lambert
- David E Richard
- Larcker
Lambert. Richard E. and David Larcker, 1985, Golden parachutes, executive decision-making, and shareholder wealth. Journal of Accounting and Economics 7, 179-203. l-inn. Scott and John J. McConnell, 1983, An empirical investigation of the impact of 'antitakeover' amendments on common stock prices, Joulnal of Financial Economics Il. 361-399.
State antitakeover laws and stock prices, Financial Analysts Journal
- Karpott
- M Jonathan
- H Paul
- Malatesta
- Pa
- Law
KarpotT. Jonathan M. and Paul H. Malatesta, 1990, PA Law: State antitakeover laws and stock prices, Financial Analysts Journal. July-Aug.. 8-10.
1. %~wmell Corporate performance, corporate takeovers and managemen turnover Additional evidence on equity ownership and corporate value
- Martin
- Kenneth
- Job
Martin, Kenneth and Job.. 1. %~wmell. 1991, Corporate performance, corporate takeovers and managemen turnover. Journal of Finance 46. 671 687. McConnell. John J. and Henri Servaes. 1990. Additional evidence on equity ownership and corporate value, Journal of Financial Economics 27. 595-612.
The impact of managerial ownership on acquisition attempts and target shareholder wealth Managerial control of voting rights: Financing policies and the market for corporate control
- Moon Song
- Ralph A Hyung
- Walkling
Song, Moon Hyung and Ralph A. Walkling. 1992, The impact of managerial ownership on acquisition attempts and target shareholder wealth, Journal of Financial and Quantitative Analysis, forthcoming. Stulz, Reni, 1988, Managerial control of voting rights: Financing policies and the market for corporate control, Journal of Financial Economics 20. 25-54.
Do target shareholders lose in unsuccessful control contests?
- Ruback
Ruback. Richard S., 1988, Do target shareholders lose in unsuccessful control contests?, in: Alan _I.
Corporate performance, corporate takeovers and management turnover
- Martin