Sub-Optimal Acquisition Decisions Under a Majority Shareholder System

Journal of Management and Governance, Vol. 8, No. 4 , pp. 373-405, December 2004

Posted: 11 May 2006

See all articles by Stefano Mengoli

Stefano Mengoli

University of Bologna - Department of Management

Marco Bigelli

University of Bologna - Department of Management

Abstract

Abstract The high separation of ownership from control achieved through the concurrent use of non-voting shares and stock pyramiding could favor acquisitions made to increase private benefits of the controlling shareholders rather than all shareholders wealth. A standard event study methodology is carried out on three different samples of Italian acquisitions during the 1989-1996 period in order to test this hypothesis. We find evidence that a worse market reaction characterizes acquiring firms with a higher separation of ownership from control, while more value-enhancing transactions are undertaken by those smaller in size and with higher prior-performance. An entrenchment effect seems to determine a significant U-shaped relationship between the market reaction and the ultimate shareholder ownership. When the sample is restricted to acquiring firms with a dual class equity structure we find that non-voting shares report significantly negative excess returns in contrast to significantly higher positive returns for voting shares. Such evidence seems to indicate that the average acquisition has been overpaid, as suggested by the negative market reaction of the non-voting shares, while it was expected to lead to higher private benefits to the majority shareholders, as suggested by the revaluation of the voting shares. Finally, the market reaction to acquisitions made within pyramidal groups seems to indicate that the price is set so as to transfer wealth towards the companies located at the upper levels, where majority shareholders own greater fractions of the companies cash flows.

Keywords: acquisitions, pyramiding, non-voting shares, event study

JEL Classification: G34, G14

Suggested Citation

Mengoli, Stefano and Bigelli, Marco, Sub-Optimal Acquisition Decisions Under a Majority Shareholder System. Journal of Management and Governance, Vol. 8, No. 4 , pp. 373-405, December 2004, Available at SSRN: https://ssrn.com/abstract=840687

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)

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