Bad Mergers Revisited: An Incentive Perspective

Matthias Kräkel and Daniel Müller

VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order from Verein für Socialpolitik / German Economic Association

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.

JEL-codes: D82 D86 G34 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-bec, nep-com, nep-cta and nep-hrm
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc13:79914

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