Conflicts of Interests Among Shareholders: The Case of Corporate Acquisitions

50 Pages Posted: 1 Dec 2006 Last revised: 29 Sep 2009

Kai Li

University of British Columbia (UBC) - Sauder School of Business; China Academy of Financial Research (CAFR)

Jarrad Harford

University of Washington

Dirk Jenter

London School of Economics; National Bureau of Economic Research (NBER); CEPR

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2007

Abstract

We identify important conflicts of interests among shareholders and examine their effects on corporate decisions. When a firm is considering an action that affects other firms in its shareholders' portfolios, shareholders with heterogeneous portfolios may disagree about whether to proceed. This effect is measurable and potentially large in the case of corporate acquisitions, where bidder shareholders with holdings in the target want management to maximize a weighted average of both firms' equity values. Empirically, we show that such cross-holdings are large for a significant group of institutional shareholders in the average acquisition and for a majority of institutional shareholders in a significant number of deals. We find evidence that managers consider cross-holdings when identifying potential targets and that they trade off cross-holdings with synergies when selecting them. Overall, we conclude that conflicts of interests among shareholders are sizeable and, at least in the case of acquisitions, affect managerial decisions.

Keywords: cross-holdings, shareholder heterogeneity, target selection, mergers and acquisitions, toeholds, synergies, agency

JEL Classification: G30, G34

Suggested Citation

Li, Kai and Harford, Jarrad and Jenter, Dirk, Conflicts of Interests Among Shareholders: The Case of Corporate Acquisitions (July 1, 2007). MIT Sloan Research Paper No. 4653-07; Rock Center for Corporate Governance Working Paper No. 35. Available at SSRN: https://ssrn.com/abstract=947596 or http://dx.doi.org/10.2139/ssrn.947596

Kai Li

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8353 (Phone)
604-822-4695 (Fax)

HOME PAGE: http://finance.sauder.ubc.ca/~kaili

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Jarrad Harford

University of Washington ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)

HOME PAGE: http://faculty.washington.edu/jarrad/

Dirk Jenter (Contact Author)

London School of Economics ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://personal.lse.ac.uk/jenter/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CEPR ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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