The Sources of Value Destruction in Acquisitions by Entrenched Managers

43 Pages Posted: 2 Mar 2010 Last revised: 30 Aug 2012

See all articles by Jarrad Harford

Jarrad Harford

University of Washington

Mark Humphery-Jenner

UNSW Business School; Financial Research Network (FIRN)

Ronan Powell

University College Dublin (UCD) - Michael Smurfit Graduate School of Business

Date Written: 2012

Abstract

Prior work has established that entrenched managers make value-decreasing acquisitions. In this study, we ask how exactly they destroy that value. Overall, we find that value destruction by entrenched managers comes from a combination of factors. First, they disproportionately avoid private targets, which have been shown to be generally associated with value creation. Second, when they do buy private targets or public targets with blockholders, they tend not to use all-equity offers, which has the effect of avoiding the transfer of a valuable blockholder to the bidder. We further test whether entrenched managers simply overpay for good targets or actually choose targets with lower synergies. We find that while they overpay, they also choose low-synergy targets in the first place, as shown by combined announcement returns and post-merger operating performance.

Keywords: Corporate Governance, Mergers, Entrenchment, Overvalued Equity, Overpayment

JEL Classification: G32, G34

Suggested Citation

Harford, Jarrad and Humphery-Jenner, Mark and Powell, Ronan G., The Sources of Value Destruction in Acquisitions by Entrenched Managers (2012). Journal of Financial Economics (JFE), Vol. 106, No. 2, 2012. Available at SSRN: https://ssrn.com/abstract=1562247 or http://dx.doi.org/10.2139/ssrn.1562247

Jarrad Harford

University of Washington ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)

HOME PAGE: http://faculty.washington.edu/jarrad/

Mark Humphery-Jenner (Contact Author)

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Ronan G. Powell

University College Dublin (UCD) - Michael Smurfit Graduate School of Business ( email )

Blackrock, Co. Dublin
Ireland

Register to save articles to
your library

Register

Paper statistics

Downloads
1,174
Abstract Views
8,866
rank
17,050
PlumX Metrics