Conflicts of Interests Among Shareholders: The Case of Corporate Acquisitions
University of British Columbia (UBC) - Sauder School of Business; China Academy of Financial Research (CAFR)
University of Washington
London School of Economics; Stanford Graduate School of Business; National Bureau of Economic Research (NBER)
July 1, 2007
MIT Sloan Research Paper No. 4653-07
Rock Center for Corporate Governance Working Paper No. 35
We identify important conflicts of interests among shareholders and examine their effects on corporate decisions. When a firm is considering an action that affects other firms in its shareholders' portfolios, shareholders with heterogeneous portfolios may disagree about whether to proceed. This effect is measurable and potentially large in the case of corporate acquisitions, where bidder shareholders with holdings in the target want management to maximize a weighted average of both firms' equity values. Empirically, we show that such cross-holdings are large for a significant group of institutional shareholders in the average acquisition and for a majority of institutional shareholders in a significant number of deals. We find evidence that managers consider cross-holdings when identifying potential targets and that they trade off cross-holdings with synergies when selecting them. Overall, we conclude that conflicts of interests among shareholders are sizeable and, at least in the case of acquisitions, affect managerial decisions.
Number of Pages in PDF File: 50
Keywords: cross-holdings, shareholder heterogeneity, target selection, mergers and acquisitions, toeholds, synergies, agency
JEL Classification: G30, G34
Date posted: December 1, 2006 ; Last revised: September 29, 2009
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