Download this Paper Open PDF in Browser

Sub-Optimal Acquisition Decisions Under a Majority Shareholder System: An Empirical Investigation

66 Pages Posted: 26 Feb 2001  

Stefano Mengoli

University of Bologna - Department of Management

Marco Bigelli

University of Bologna - Department of Management

Abstract

The high separation of ownership from control achieved in many Italian listed companies through the concurrent use of non-voting shares and stock pyramiding may favour acquisitions made to increase private benefits of the controlling shareholders rather than all the shareholders' wealth. A standard event study methodology is carried out on three different samples of acquisitions during 1989-1996 period in order to test the hypothesis. Firstly, we find evidence that poor performance is more likely to occur in acquiring firms where the separation of ownership from control (as measured by the o/c ratio) is higher. Moreover, value-enhancing transactions are found to be more likely embarked by acquirors smaller in size, with higher prior-performance and higher growth. Secondly, restricting the sample to aquirors with both voting and non-voting shares we show that the average cumulative abnormal returns (CARs) in a 60-day event window is +0.48 percent for the voting versus a significantly lower -4.41 percent for the non-voting shares. We explain this picture as evidence that on one side the average acquisition has been overpaid (as suggested by the negative sign of the non-voting shares). On the other side it reveals that the transaction was expected to lead to higher private benefits to the majority shareholders (as suggested by the revaluation of the vote component as difference between the two classes of shares). Finally, the market reaction to 19 acquisitions where both bidder and seller are held by the same controller clearly shows that the price is set so as to transfer wealth towards the companies located at the upper levels, where the ownership of the majority shareholders is less diluted. We interpret these findings as evidence that through the separation of ownership from control entrenched-majority shareholders owning only a minor fraction of cash flow rights may lead corporate wealth destroying investment decisions. Moreover, we show that the risk of expropriation seems to be the major principal-agent problem in a country characterised by poor legal investor protection, of which Italy may be an ideal archetype

Keywords: Acquisitions, event study, non-voting shares, pyramidal groups, private benefits

JEL Classification: G34, G14

Suggested Citation

Mengoli, Stefano and Bigelli, Marco, Sub-Optimal Acquisition Decisions Under a Majority Shareholder System: An Empirical Investigation. EFMA 2001 Lugano Meetings. Available at SSRN: https://ssrn.com/abstract=261311 or http://dx.doi.org/10.2139/ssrn.261311

Stefano Mengoli (Contact Author)

University of Bologna - Department of Management ( email )

Via Capo di Lucca, 24
http://stefanomengoli.weebly.com/
Bologna, Bologna 40132
Italy

Marco Bigelli

University of Bologna - Department of Management ( email )

Via Capo di Lucca 34
Bologna, 40126
Italy
+39 051 2098060 (Phone)
+39 051 6390612 (Fax)

Paper statistics

Downloads
686
Rank
30,024
Abstract Views
2,800