Merger Efficiency and Managerial Incentives

Matthias Kräkel and Daniel Müller

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: We consider a two-stage principal-agent model with limited liability in which a CEO is employed as agent to gather information about suitable merger targets and to manage the merged corporation in case of an acquisition. Our results show that the CEO systematically recommends targets with low synergies—even when targets with high synergies are available—to obtain high-powered incentives and, hence, a high personal income at the merger-management stage. We derive conditions under which shareholders prefer a self-commitment policy or a rent-reduction policy to deter the CEO from opportunistic recommendations.

Keywords: acquisition; merger; moral hazard (search for similar items in EconPapers)
JEL-codes: D82 D86 G34 (search for similar items in EconPapers)
Date: 2013-06-02
New Economics Papers: this item is included in nep-bec, nep-com, nep-cta, nep-hrm and nep-ind
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Journal Article: Merger efficiency and managerial incentives (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:trf:wpaper:410

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