Benefits of Control, Managerial Ownership, and the Stock Returns of Acquiring Firms

Robert Hubbard and Darius Palia

No 5079, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines the effect of the benefits of corporate control to managers on the relationship between managerial ownership and the stock returns of acquiring firms in corporate control transactions. At low levels of managerial ownership, agency costs of equity (such as perquisite consumption) reduce the returns earned by acquirers. As the managerial stake in the acquiring firm increases, the interests of managers are more closely aligned with those of shareholders, reducing the acquisition premium. At sufficiently high levels of managerial ownership, managers value a reduction in the risk of their nondiversified financial portfolio. However, managers enjoy nonassignable private benefits of control at high levels of ownership which they are not willing to lose by selling their stake in the financial markets. These benefits of control are increasing in the managerial ownership stake and can lead to managers 'overpaying' even when they own a substantial fraction of the firm. Examining mergers that occurred during 1985 to 1991, we find evidence of such a nonmonotonic relationship between the stock returns earned by acquirers and their managerial ownership level. Further, we find that acquiring firms with high levels of managerial ownership tend to diversify more than acquiring firms with low levels of managerial ownership.

JEL-codes: G3 (search for similar items in EconPapers)
Date: 1995-04
Note: CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (48)

Published as Rand Journal of Economics, 26, (Winter 1995), pp. 782-792.

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Journal Article: Benefits of Control, Managerial Ownership, and the Stock Returns of Acquiring Firms (1995)
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