Managerial Ownership, Method of Payment for Acquisitions, and Executive Job Retention
Posted: 27 Sep 2001
I hypothesize that corporate control considerations determine the choice of financing over a middle range of ownership that excludes very high and very low levels ownership. Target managers who value control and wish to maintain control prefer stocks which increase their chances of retaining control after the merger, while acquiring managers who value control prefer cash rather than stocks which dilute their ownership and increase the risk of losing control. I find that increases in ownership of target managers and decreases in ownership of acquiring managers lead to an increase in the likelihood of stock financing over a middle range of ownership only. Market evidence suggests that shareholders benefit most when acquiring managers with high ownership use cash or a mix of cash and stocks to acquire targets with low managerial ownership. Acquiring shareholders lose when stocks are used to finance mergers, irrespective of ownership levels.
Note: Previously titled Managerial Ownership, Choice of Financing and Gains from Mergers and Acquisitions
JEL Classification: G32, G34
Suggested Citation: Suggested Citation