Structural Investigation of Acquiring Managers' Incentives in Takeovers

70 Pages Posted: 15 Mar 2012 Last revised: 16 May 2012

See all articles by Di Li

Di Li

Peking University - HSBC School of Business

Date Written: May 16, 2012

Abstract

This paper quantifies the degree of agency conflicts in acquiring firms. By estimating managerial valuations using a structural method and calculating shareholder valuations from stock market reactions to takeovers, I find that acquiring managers overvalue targets by 63% of target capitalization. As a result, acquiring managers pick targets that provide no synergy gains in 17% of takeovers and overbid by 13% of target capitalization in the rest. Private benefits sought by acquiring managers amount to $9 million on average and vary substantially across firms. Agency problems are more severe for larger bidders that have greater free cash flows and chase larger targets. However, an independent board can reduce private benefits and mitigate agency problems for acquiring firms.

Keywords: M&As, Private Benefits, Overvaluation, Overbidding, Structural Estimation

JEL Classification: C11, D44, G30, G34

Suggested Citation

Li, Di, Structural Investigation of Acquiring Managers' Incentives in Takeovers (May 16, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2022615 or http://dx.doi.org/10.2139/ssrn.2022615

Di Li (Contact Author)

Peking University - HSBC School of Business ( email )

Peking University HSBC Business School, Office 615
University Town
Shenzhen, Guangdong 518055
China
+86 755-2603-1509 (Phone)

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