Benefits of Control, Managerial Ownership, and the Stock Returns of Acquiring Firms / R. Glenn Hubbard, Darius Palia.

Format:

Book

Author/Creator:

Hubbard, R. Glenn, author.

Palia, Darius, author.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w5079.

NBER working paper series no. w5079

Language:

English

Physical Description:

1 online resource: illustrations (black and white).

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1995.

Summary:

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.

Notes:

Print version record

April 1995.