Managerial Risk-Taking Incentives and Merger Decisions
76 Pages Posted: 16 Mar 2013 Last revised: 29 Mar 2017
Date Written: March 28, 2017
We provide evidence concerning the effect of managerial risk-taking incentives on merger and acquisition (M&A) decisions and outcomes for different types of mergers: vertical, horizontal, and diversifying. Using chief executive officer (CEO) relative inside leverage to proxy for the incentives of risk-averse managers, we find that CEOs with higher inside leverage are more likely to engage in vertical mergers, and those mergers generate lower announcement returns for shareholders. This effect of CEO relative inside leverage on returns for shareholders in vertical acquisitions is more pronounced when the acquirer has a higher degree of informational opacity, weak governance, and excess cash.
Keywords: Managerial risk-taking incentives; Vertical integration; Shareholder wealth
JEL Classification: G34, G32, J33, M12
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