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The sources of value destruction in acquisitions by entrenched managers

Author

Listed:
  • Harford, Jarrad
  • Humphery-Jenner, Mark
  • Powell, Ronan
Abstract
Prior work has established that entrenched managers make value-decreasing acquisitions. In this study, we determine how they destroy that value. Overall, we find that value destruction by entrenched managers comes from a combination of factors. First, they disproportionately avoid private targets, which have been shown to be generally associated with value creation. Second, when they do buy private targets or public targets with blockholders, they tend not to use all-equity offers, which has the effect of avoiding the transfer of a valuable blockholder to the bidder. We further test whether entrenched managers simply overpay for good targets or choose targets with lower synergies. We find that while they overpay, they also choose low synergy targets in the first place, as shown by combined announcement returns and post-merger operating performance.

Suggested Citation

  • Harford, Jarrad & Humphery-Jenner, Mark & Powell, Ronan, 2012. "The sources of value destruction in acquisitions by entrenched managers," Journal of Financial Economics, Elsevier, vol. 106(2), pages 247-261.
    • Handle: RePEc:eee:jfinec:v:106:y:2012:i:2:p:247-261
    DOI: 10.1016/j.jfineco.2012.05.016
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    References listed on IDEAS

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    More about this item

    Keywords

    Corporate governance; Mergers; Entrenchment; Blockholders; Overpayment;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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