The Sources of Value Destruction in Acquisitions by Entrenched Managers

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2012-07-04

Summary:

Editor’s Note: The following post comes to us from Jarrad Harford, Professor of Finance at the University of Washington; and Mark Humphery-Jenner and Ronan Powell, both of the Australian School of Business at the University of New South Wales.

In our paper, The Sources of Value Destruction in Acquisitions by Entrenched Managers, forthcoming in the Journal of Financial Economics, we identify how acquisitions by entrenched managers destroy value. Managerial entrenchment is often seen as worsening corporate governance and facilitating agency-motivated investments. We analyze the role of entrenchment in acquisitions by (not for) entrenched firms. We focus on acquisitions by entrenched managers in order to examine the impact of entrenchment on managerial investments. We find that value-destruction in acquisitions by entrenched acquirers arises for several reasons:

  • Entrenched acquirers disproportionately avoid private targets, which have been shown to be associated with value-creation.
  • If entrenched acquirers do buy an unlisted target (or a public target with a blockholder), they tend not to pay with stock, thereby avoiding the governance benefits that would otherwise accrue from creating a blockholder in the bidder.
  • Entrenched bidders tend to both overpay and acquire low-synergy targets, which manifest in lower combined bidder/target announcement returns and lower post-acquisition operating performance.

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Link:

http://blogs.law.harvard.edu/corpgov/2012/07/04/the-sources-of-value-destruction-in-acquisitions-by-entrenched-managers/

From feeds:

Blogs.law Aggregation Hub » The Harvard Law School Forum on Corporate Governance and Financial Regulation

Tags:

mergers & acquisitions academic research empirical research target firms firm valuation entrenchment jarrad harford mark humphery-jenner overbids ronan powell

Authors:

R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation,

Date tagged:

07/04/2012, 15:28

Date published:

07/04/2012, 08:41